2018. 6. 22 Geopolitical Strategy Report Towards CVIP Complete, Visible, Irreversible Prosperity *Image: Samsung C&T advertisement (1996) Research Center SeungMin You Chief Strategist 822 2020 7024 strategist.you@samsung.com Hyein Ok Strategist 822 2020 7795 hyein.ok@samsung.com Dongyeol Moon Strategist 822 2020 7792 dongyeol.moon@samsung.com Towards CVIP Complete, Visible, and Irreversible Prosperity (CVIP) Conflict on the Korean Peninsula, the last bastion of the Cold War, is coming to an end. An era of 'complete, visible, and irreversible prosperity' (CVIP) lies ahead. The outlook is bright. If South Korea combines its wealth and industrialization knowhow with North Korea's human and natural resources, the economies of both nations could make a quantum leap over the long term. True, the road ahead disappears beyond the horizon, and grave doubts linger, but the obstacles to peace and prosperity can be overcome. Things have already begun in a strong and innovative way. Even a few months ago, there was great skepticism over whether the North Korea-US summit for denuclearization would even take place. But it did, and the outcome should prove to be a historic inflection point. And yet some remain highly doubtful of North Korea's commitment to 'complete, verifiable, and irreversible dismantlement' (CVID). In our view, however, the skeptics need to understand how the situation on the Korean Peninsula has changed. The development of nuclear weapons and missile technology has played its intended role, and going forwards, the economy should come front and center, as North Korea has already passed the point of no return in terms of the adoption of a market economy. Under its own steam, the country now needs to produce a 'complete, verifiable, and irreversible guarantee' (CVIG) by utilizing the new circumstances on the Korean Peninsula, and North Korean leader Kim Jongun knows this well. The roles of neighboring countries should be important—and none more so than South Korea's. Disputes over how to finance North Korea's economic reconstruction will inevitably arise. In our view, all projections of the economic costs of unification are wrong because all are based on Germany's 'unification by absorption' model. Rather, with the international community now recognizing North Korea's nationhood, it is more appropriate to approach the issue of unification from the perspective of 'gradual economic integration.' This approach should allow the South to avoid significant costs but still enjoy the benefits immediate unification would provide. North Korea, for its part, should not relinquish its proactive role in economic reconstruction, as it can leverage its right to reparations from Japan and request financial assistance from the international community. Upon the lifting of international sanctions, North Korea should pursue economic reform and market opening—initially centered on special economic zones—with the goal of producing tangible results while keeping the regime stable. We take particular note of the special economic zone in Wonsan, Kim Jong-un's hometown. Over the longer term, North Korea should add more regions to its 'market opening' list. Compared to other communist nations that pursued market opening, North Korea has many strengths, including a solid political system, a geographical location favorable to international trade, and ample natural and human resources. Backed by inter-Korean economic collaboration, the Korean Peninsula should evolve to become one of the Far East's key manufacturing bases. Contents I. North Korea-US summit and future outlook I-1. Outcome of Singapore summit I-2. North Korea already past “point of no return” III. North Korea’s economic reconstruction and related 4 10 II. North Korea’s economic reconstruction and III-1. Kim Jong Un’s first 5-year economic development strategy 53 III-2. Assessment of North Korea’s infrastructure 61 III-3. North Korea’s economic reconstruction projects 71 III-4. Economic development zones and specially designated funding dispute II-1. Loophole of previous projections of reconstruction costs opportunities zones first to open 18 III-5. Wonsan-center of attention 94 110 II-2. Japanese war reparation to be seed money for reconstruction of North Korea II-3. Funding of initial investment costs via international agencies 29 40 IV. Reference IV-1 Moon Jae-in administration’s new economic roadmap initiative for Korean peninsula 128 IV-2. Case studies—market opening in China, Vietnam, and Poland 142 IV-3. Economic comparison of South and North Korea 170 IV-4. North Korea’s financial system 183 IV-5. Others 191 I. North Korea-US summit and outlook I-1. Outcome of Singapore summit I-2. North Korea already past point of no return Singapore summit – comprehensive agreement reached; practical negotiations to come Summary US CVID Goal Complete, Verifiable, Comprehensive joint statement Establish US-DPRK relations Build lasting/stable peace Work toward complete denuclearization Repatriate POW/MIA remains Irreversible Dismantlement North Korea CVIG Complete, Verifiable, Irreversible First step toward CVIP era Guarantee Complete, Visible, Irreversible Prosperity 5 Trump and Kim's joint statement (1) (1) Establish new US-DPRK relations The United States and the DPRK commit to establishing new US-DPRK relations in accordance with both countries' desire for peace and prosperity Issues for future discussion ▶ Signing of treaty of non-aggression; establishing US-DPRK relations (2) Build lasting and stable peace The United States and the DPRK will join efforts to build a lasting and stable peace regime on the Korean Peninsula Issues for future discussion ▶ Declaration of the end of the Korean War; signing of peace treaty 6 Trump and Kim's joint statement (2) (3) Work toward complete denuclearization Reaffirming the Apr 27, 2018 Panumunjeom Declaration, the DPRK commits to work towards complete denuclearization of the Korean Peninsula Issues for future discussion ▶ Quickly begin gradual implementation of denuclearization; North Korea's full reporting of its compliance and the international community's scrutiny of that; the abolition of all nuclear weapons and nuclear programs; confirmation of North Korea's denuclearization roadmap (4) Repatriate POW/MIA remains The United States and the DPRK commit to recovering POW/MIA remains, including the immediate repatriation of those already identified Issues for future discussion ▶ Gradual repatriation of the remain of 6,000 US military personnel 7 Post-summit: Others High-ranking officials in US and North Korea to seek follow-up negotiations ▶ US Secretary of State Mike Pompeo and to seek follow-up negotiations with his North Korean counterpart as soon as possible Two leaders to visit each other’s country and have summits ▶ Trump and Kim to visit each other's country Trump hints at scaling down South Korea-US Joint Military Excise US and North Korea exclude possibility of war on Korean Peninsula ▶ US to lead North Korea on path to prosperity instead of waging war against the nation Denuclearization costs for North Korea ▶ Trump stresses the roles of South Korea and Japan 8 (Ancillary information) Multi-dimensional approach to denuclearization Stage 1 Stage 2 Stage 3 Stage 4 Agenda Nuclear program frozen prepare Nuclear program frozen Complete nuclear disarmament Denuclearization Level of denuclearization Executed Partly executed (Punggye-ri) Under negotiation Under negotiation Key issue North announces moratorium on nuclear/missile tests Suspend future nuclear production (freezing production of nuclear materials) Suspend nuclear production (report nuclear facilities, close and disable the facilities, suspend nuclear weapons production) Remove nuclear weapons (dispose of nuclear weapons, return to non-proliferation treaty) US-North relationship Start contact Announce start of North-US diplomatic relationship negotiations, Ease sanctions against North Open North-US liaison office Establish diplomatic relations, repeal sanctions against North South-US relationship Adjust South-US military exercises Reduce South-US military exercises Adjust scale and role of USFK Dissolution of UN Command Transfer wartime opcon (?) Resume humanitarian assistance Ease economic sanctions Enlarge relief assistance Push for economic cooperation between South/North, Russia, and China Connect energy transportation grid between South/North, Russia, and China Join international financial and economic organizations Lift economic sanctions Economic cooperation Source: Ifans, Samsung Securities 9 I. North Korea-US summit and outlook I-1. Outcome of Singapore summit I-2. North Korea already past point of no return North Korea already past “point of no return” Summary Kim Jong-un's national vision and economic/nuclear dual policy: After the sudden death of North Korean leader Kim Jong-il in 2011, his third son, Kim Jong-un, inherited the nation ill-prepared. He spent his first several years in power neutralizing political enemies before presenting his national vision—'completing the construction of a powerful socialist state'—at the 7th Congress of the Workers' Party of Korea (2016). This was a more advanced version of his father's moto of ‘creating a strong nation.’ To that end, he adopted a dual economic/nuclear policy and earnestly sought nuclear capabilities through last year. After ‘completing’ his nuclear program, he declared North Korea a nuclear state—though the nation still lacked missile re-entry capabilities. Kim Jong-un’s goal is to leverage its nuclear status to win a seat at the negotiation table with the US—though without crossing the fine line that would provoke US action. Kim Jong-un is now preparing for a new era. Kim Jong-un's 2022 project: The ongoing US-led “maximum pressure and engagement” policy towards North Korea is unprecedented. US economic sanctions have targeted areas deeply connected to regular North Korean citizens. Even China, which has previously been passive in backing US sanctions, is participating. Some have argued that the sanctions in place, if maintained, will lead to a foreigncurrency crisis for North Korea in a matter of years. Yet, we do not believe this is the sole reason the North has come to the negotiation table. Kim Jong-un wants his dual economic-nuclear dual policy to deliver visible results prior to the 8th Workers' Party Congress (in 2022), and essential to that is the outcome of the nation's first five-year economic strategy, which ends in 2020. The young dictator believes North Korea has much to gain by exploiting political timelines in key nations. The US will hold mid-term elections in 2018 and its next presidential election in 2020, while Xi Jinping requires stability on the Korean Peninsula to help ensure a successful second term and extend his political power at the 20th National Congress of the Communist Party of China in 2022. North Korea already past point of no return: The market remains highly doubtful over North Korea's commitment to denuclearization. Indeed, many would argue that Kim Jong-un will never give up his nuclear weapons. But from a structural point of view, we would argue that he has already crossed the point of no return, as ‘the economy’ should now take over from ‘nuclear’ as the regime's means of survival. North Korean citizens have already experienced a market economy (both directly and indirectly), and openness to the market system should be irreversible once the nation proceeds with a stronger economic reforms and market opening. If economic reconstruction in North Korea results in improvement in citizens' livelihoods, it should cement Kim Jong-un's base of support—though this would also run the risk of running counter to the Juche ideology, hitherto the regime's primary means of sustaining its political power. While North Korea is likely to try to temper the pace at which it opens up, we are not sure whether the outcome would be as intended. All told, whether or not the North ultimately gives up its nuclear weapons will depend on internal pressure, not external pressure. 11 Kim Jong-un's national vision to 'complete' the socialist state 7th Congress of the Worker's Party of Korea in 2016 adopted 'completion of socialist state' as national vision ▶ 'Construction' of nuclear and economic powerhouse → 'completion' of powerful socialist state 7th Congress of the Worker's Party of Korea (2016): Key policies Indoctrinate society with Kim Il-sung and Kim Jong-il's juche philosophy Complete construction of socialist state Strengthen people's government Reform society, technology, and culture Self-reliance is paramount Politically strong state • Sole leadership of Worker's Party of Korea and central committee • Unity of leader, party, and public • People-first policy • Self-governing, emphasis on youth • Fight bureaucracy, corruption Pursue dual economic-nuclear policy Militarily strong state • Sole leadership of Worker's Party of Korea and central committee • Self-reliant defense • Emphasize weapons stockpiles, military • Nationwide, 'entire population' defense system Complete, according to Kim Jong-il State strong in science, technology, and civilization • Use high tech to power economic growth • Advance space science and technology • Strengthen engineering and basic sciences • Reform educational system • Build modern cultural and emotional experience centers Partly achieved in 2017 Economically strong state • Self-reliant knowledge economy (new industrial revolution) • Modernization, informatization, scientization of economy • Calculated and balanced economic development • Thorough implementation of 5-year economic plan • Socialist corporate responsible management system, external economic relations Incomplete 12 Changes in Kim Jong-un's New Year's messages Kim Jong-un declared his commitment to economic reconstruction this year ▶ Declared completion of nuclear weapons capability in Nov 2017 ▶ Targeted strengthening of economic independence and people's standard of living from this year 2017 New Year's Address (…) We briskly developed state-of-the-art military hardware, and entered the final stage of preparation for the test launch of intercontinental ballistic missile; we achieved other marvelous successes one after another for the consolidation of the defense capability. This provided a powerful military guarantee for defending the destiny of the country and nation and victoriously advancing the cause of building a powerful socialist country. (…) We will continue to build up our self-defense capability, the pivot of which is the nuclear forces, and the capability for preemptive strikes… 2018 New Year's Address (…) The year 2017 was a year of heroic struggle and great victory, a year when we set up an indestructible milestone in the history of building a powerful socialist country with the spirit of self-reliance and self-development as the dynamic force. (…) An outstanding success our Party, state, and people won last year was the accomplishment of the great, historic cause of perfecting the national nuclear forces. (…) Let us launch a revolutionary general offensive to achieve fresh victory on all fronts of building a powerful socialist country. This is the revolutionary slogan we should uphold. (…) A breakthrough should be made in reenergizing the overall economic front this year, the third year of implementing the five-year strategy for national economic development. The central task facing socialist economic construction this year is to enhance the independence and Juche character of the national economy and improve the people's standard of living… 13 Did North Korea 'complete' its nuclear program? Completion of nuclear forces requires: 1) nuclear capability; and 2) missile capability ▶ Despite multiple ICBM and IRBM tests, North Korea still lacks missile re-entry capability and terminal guidance technology Proven North Korea: Nuclear test history Nuclear test Hwasong-12 Unproven Explosive power 1st Oct 2006 1 kt 2nd May 2009 3-4 kt Hwasong-14 Medium range: Scud, KN-11, Nodong 3 4 1 Alaska N.K. rd 3 Feb 2013 Taepodong-2 5 6-7 kt Japan 4th Jan 2016 6 kt 5th Sep 2016 10-20 kt 6th Sep 2017 50-120 kt 2 USA Guam Intermediate range: Musudan Hawaii 14 Why North Korea is shifting to dialogue Strategic shift aimed at completing socialist state ▶ Kim Jong-un, who was educated in western schools, wants to make North Korea a normal state ▶ He is eager to utilize political timelines in key nations to 'complete' the socialist state in 2022 US-led 'maximum pressure and engagement' policy paying off ▶ North Korea's economy will take a hit if the US prolongs economic sanctions, which are stronger than ever Legal exports and items closely linked to civilian life are subject to US sanctions (eg, UN Resolution 2375—exports of textiles, metals, and agricultural products are banned) Investment in North Korea, North Korea's labor exports, and its oil and petrochemical product imports are all restricted ▶ China commits fully to US-led sanctions ▶ Some argue that current sanctions will lead to a foreign-currency crisis in North Korea in a matter of years 15 Kim must legitimize inherited power by showing capabilities Kim Jong-un to utilize political timelines in key nations to prove his leadership and extend his reign ▶ Kim Jong-un wants to make serious progress with his dual economic-nuclear policy before the 8th Congress of Workers' Party (2022) → He wants to remain in power ▶ Donald Trump would like to resolve the North Korean nuclear issue prior to the mid-term and presidential elections ▶ Xi Jinping requires stability on the Korean Peninsula to help ensure a successful second term ▶ That said, whether Kim Jong-un will ultimately give up nuclear weapons should remain disputed 2017 North Korea - 11th anniversary of North Korea's first nuclear test (Oct 9) - 6th nuclear test (Sep 3) - Declaration of completing development of nuclear weapons Complete development of nuclear weapons - Participate in Pyeongchang Winter Olympics - Begin South-North, North-US dialogues 2019 2020 - 75th anniversary of founding of Workers' Party of Korea (Oct) - 20th anniversary of North Korea-US communique (Oct) Remove sanctions via negotiations - Mid-term elections (November) US China 2018 - 46th presidential election - Congressional elections (November) - 80th year since birth of Kim Jung-il (Feb) - 110th year since birth of Kim Il-sung (Apr) - 8th Congress of Workers' Party; likely to announce success of simultaneous pursuit of developing economy and nuclear weapons Guarantee regime security - Mid-term elections (November) - 20th National Congress of the Communist Party of China (October - November) - 19th National Congress of the Communist Party of China (Oct 18) Korea 2022 - Local elections (June); - Constitutional amendment referendum (TBD) - 21st general election (May) - 20th presidential election (March) - Local elections (TBD) Source: KNDA, KINU, Ministry of Unification, Samsung Securities 16 North Korea already past point of no return Paradox of economic reconstruction ▶ If economic reconstruction in North Korea results in improvement in citizens' livelihoods, this could help cement Kim Jong-un's support base ▶ This development, however, risks running counter to the Juche ideology, hitherto the regime's primary means of sustaining political power ▶ Whether or not North Korea ultimately gives up nuclear weapons should be determined by internal pressure, not external pressure North Korea: Mobile phone subscriber penetration (people per hundred people) 16 14.26 14 12.88 11.19 12 9.72 10 8 6.87 6 4.06 4 2 1.76 0.28 0 2009 2010 2011 2012 2013 2014 2015 2016 Source: National Statistical Office 17 II. North Korea's economic reconstruction and funding dispute II-1. Flawed premises in previous projections of reconstruction costs II-2. Japanese reparations to be seed money for reconstruction II-3. International agencies to provide initial funding Loophole of previous projections of North Korea's economic reconstruction costs Summary Unification cost projections all based on Germany's 'unification by absorption' model: From a broad perspective, the costs of economic unification on the Korean Peninsula include those related to economic integration and system change, and those related to social instability and inter-Korean confrontation. From a narrow perspective, the costs (among total economic unification costs) include those related to supporting North Korea (eg, costs for crisis management, system integration, and economic investments). In the simplest terms, all projections of unification costs have thus far been based on the premise of South Korea absorbing North Korea—leading some to predict that unification would be not a blessing but a disaster. But with the US now recognizing North Korea’s status as a nation, a new approach is needed. Thus, it would be absurd to persist with the 'unification by absorption' premise when calculating unification costs. We now believe the more plausible scenario is that the two Koreas will move towards 'economic unification' via economic cooperation. A more rational approach to calculating economic reconstruction costs: It is more perspicacious to calculate economic reconstruction costs on the premise of the two Koreas seeking gradual economic cooperation. A precondition for this should be that the economic gap is reduced to the point where economic integration becomes a possibility. ‘Economic integration’ is defined as two or more states creating a single economic zone via the partial integration of economic policies. A key example is the eurozone, the goal of which is to create economic benefits for participating countries, and, over the long term, guarantee the free movement of output and production factors between nations by eliminating regulations and barriers. Moreover, economic integration means the integration of economic space (making possible uniform systems, policies, and practices) via the formation of a single economic zone. In other words, for the Korean Peninsula, it would involve raising North Korean citizens' income to a certain level and then making investments aimed at the reconstruction of the country. Moon Jae-in administration's new economic roadmap initiative for Korean Peninsula and economic unification ideas: Economic unification on the Korean Peninsula should differ from ordinary instances of economic unification in that the former may be an early step towards the political unification of the two Koreas. Inter-Korean economic integration would mark the initial phase of the Moon Jae-in administration's economic unification plan. In pursuit of economic unification, the administration is seeking resumption of inter-Korean economic cooperation and a new economic map for the Korean Peninsula. In reality, gradual economic integration (vs unification by absorption) should be more advantageous to both, as it would cost the South far less but still lead to the same benefits. South Korea should enjoy gains, such as a decline in defense costs, dissipation of ideology maintenance costs, bigger economies of scale, and organic integration of regional economies with the North. For its part, North Korea should gain all the same benefits and more (eg, modification to distorted industry structure by lowering defense portion of spending). 19 Unification cost projections mostly based on Germany’s ‘unification by absorption’ method Unification costs ▶ Broad definition: Comprehensive costs involved in the process of the two Koreas unifying Costs for economic unification and system change Costs related to social instability and inter-Korean confrontation ▶ Narrow definition: Costs related to developing North Korea (among total economic unification costs) Crisis management costs (government-led): covering measures for immigrants, basic livelihood security, and unemployment System integration costs (government-led): converging integration of currencies, laws, administrative services, and social security systems Economic investment costs (government-led; private-sector participation): covering infrastructure expansion, industry investment, and restructuring → to be key points of discussion down the road Projected unification costs for Germany (1991-2003); adaptability to Korea (EURb) Cost Portion (%) 160 12.5 Partial 90 7.0 X Social security systems 630 49.2 X Donations 295 23.0 X Other (eg, payrolls, defense spending) 105 8.2 X 1280 100.0 Infrastructure Support for company activities Total Needed for Korean economic integration? Source: Federal Ministry of Construction and Transportation of Germany, Federal Council of Economic Advisors of Germany 20 Moon Jae-in administration puts ‘economic integration’ ahead of ‘unification by absorption’ Definition of economic integration ▶ Definition: Building a single economic zone between two or more states through partial integration of economic policies Aims to create economic benefits for participating countries (eg, integration of eurozone) ▶ Eliminating regulations and barriers Guaranteeing free movement of output and production factors ▶ Formation of single economic zone Establishing single economic zone, where uniform systems, policies, and practices are applied Degrees of economic integration Stage Type Features 1 Free Trade Area Tariffs and quotas are abolished 2 Customs Union Common tariffs and quotas for trade with non-members 3 Common Market Restrictions on factor movement are abolished 4 Economic Union Co-ordination of national economic policies 5 Total Economic Integration All relevant economic policies conducted at the supranational level Source: B. Balassa, The Theory of Economic Integration(London: George Allen & Unwin Ltd., Fourth Impression, 1973) 21 More rational to approach North Korea's reconstruction costs as ‘economic integration costs’ than as ‘unification costs’ Changing circumstances on Korean Peninsula ▶ Korean Peninsula to move toward unification over long term ▶ Projecting unification costs under ‘unification by absorption’ schema flawed now that US recognizes North Korea’s nationhood ▶ The two Koreas to go through processes of economic cooperation, then economic integration, and then economic unification ▶ North Korea will want to rebuild its economy at its own pace and according to its own plan Top priority to be given to rebuilding economy via gradual reform and market opening North Korea to be in driver's seat in terms of choosing development method Investing in North Korean infrastructure to become a competitive domain for South Korea, China, Japan, and Russia Rational approach to North Korea's economic reconstruction costs ▶ Reconstruction cost projections should be based on premise of two Koreas seeking ‘gradual economic integration.’ ▶ A condition should be that the inter-Korean economic gap is reduced to a level whereby economic integration is possible, through collaboration with neighboring countries. To raise North Korean citizens' income to a certain level of their South Korea counterparts’ To include economic costs needed to reconstruct North Korea over a certain period of time 22 Moon Jae-in administration's new economic roadmap for Korean Peninsula and economic unification ideas Inter-Korean economic cooperation to differ from ordinary economic cooperation ▶ The former is part of the two Koreas' political unification Initial phase of Moon Jae-in administration's economic unification concept Targets ▶ To resume inter-Korean economic cooperation, pursue new economic map initiative for Korean Peninsula, explore economic opportunities as one market, and lay foundation for economic unification Key content ▶ (New economic map initiative for Korean Peninsula) create new growth engines by establishing three economic belts and widening economic territory towards Northeast Asia and Eurasia Energy-resource belt on the east coast: Co-develop Mount Kumgang, Wonsan, Dancheong, Cheongjin and Naseon, connecting east coast with Russia Industry-logistics and distribution-transportation belt on the west coast: Construct west coast inter-Korean economic cooperation belt connecting Seoul, Gaeseong industrial complex, Pyongyang, Nampo, and Shinuiju Eco-tourism belt in the Demilitarized Zone (DMZ): Build tourism belt connecting Mount Seorak, Mount Kumgang, Wonsan, and Mount Baekdu, emphasizing environment and peace ▶ Creation of single market: Create single-market cooperation plan via private-public collaboration network and establish peace between the two Koreas via gradual cooperation ▶ Resumption of inter-Korean relations: Provide support to firms damaged by inter-Korea economic cooperation projects as quickly as possible, normalize development of Gaeseong industrial complex , resume Mt. Kumgang tourism project when time is ripe, and cooperate to co-develop natural resources ▶ Development of boarder areas: Designate and run special economic unification zone, establish joint management committee for border areas, and create special zone for peace and cooperation on the west coast 23 Gradual ‘economic integration’ to cost less than immediate unification by absorption, but result in same benefits Integration benefits Economic benefits for South Korea Elimination of confrontation costs Defense costs Decline in defense spending Cut in defense manpower Ideology maintenance costs Elimination of ideology-education and PR costs Elimination of related agencies' maintenance costs Economic benefits Non-economic benefits for South Korea Humanitarian benefits Resolve issue of separated families Boost human rights and freedom in North Korea Political benefits Enhance status in international community Ease war risk Cultural benefits Develop academic community and culture Boost opportunities for tourism, leisure, and cultural services Economic benefits for North Korea Elimination of confrontation costs Defense costs Decline in defense spending Cut in defense manpower Provide rice reserved for military to citizens Ideology maintenance costs Elimination of ideology-education and PR costs Elimination of related agencies' maintenance costs Correction of distorted industry structure Cut defense portion of total industries Economic benefits Economies of scale Expansion of market Organic integration of two Koreas’ regional economies To become more mutually complementary between industries and production factors Boost efficiency in land development and environmental protection Increase trade with China and Russia; cut logistics costs Source: Ministry of Unification (2011), Samsung Securities Change in economic system Boost investment via privatization Bolster efficient allocation of production factors Attract more overseas investment and boost credit rating in international community Economies of scale Expansion of market Organic integration of two Koreas’ regional economies Same as South Korea Boost technology innovation and productivity 24 (Ancillary information) Unification cost projections: Overview of types Income-target method Item-by-item method Type Top-down Bottom-up Details First set income target for North Korean citizens Then project costs needed to reach it First project costs by item Then sum costs Method Utilizing quantitative methods, such as computable general equilibrium model (CGE) and incremental capital output ratio (ICOR) Selecting items with reference to Germany's unification Set assumptions for each item Sum costs Pros Capable of projecting long-term economic costs needed for inter-Korean economic cooperation Capable of projecting detailed statement of itemized costs (by using information on North Korea) and coming up with funding method that fits each item Cons Quantitative methods can be wrong as they assume: 1) perfectly competitive market and full equilibrium of factors of production; and 2) every country’s ICOR is different* Listing all possible items in advance is impossible Projected costs per item can differ from actual figures Source: KDB (2017) 25 (Ancillary information) Key institutions’ cost projections (income-target method) Methodology Institution/ Author Unification cost estimation Expenditure period (after unification) Notes Incremental Capital Output Ratio An Ye-hong, Moon Sung-Min (2007) USD264.8b (ICOR=2.5) 13 years Economic costs of bringing North Korea’s per capita GNI (post-unification) to USD10,000 Incremental Capital Output Ratio Hong Sun-jik, Choi Sung-geun (2010) USD157b (ICOR=3.14) 10 years Economic costs of bringing North Korea’s per capita income (post-unification) to USD3,000 Incremental Capital Output Ratio Jo Hyun-ju (2011) USD147.3b (ICOR=3.14) 10 years Economic costs of bringing North Korea’s per capita income (post-unification) to USD3,000 Incremental Capital Output Ratio Lee Doo-suk, Kim Doo-eul (2011) USD527b (ICOR = 1.94-2.74) 20 years Assuming North Korea’s GDP growth (postunification) hits 14% pa over 2015-2024 and 10% pa over 2025-2034 Computable General Equilibrium Model KIEP, KIET (2011) 3.4% of constant GDP of South Korea 10 years each side of unification Taking into account the impact of South Korea’s North Korean support (including direct support) • Direct support equivalent to 2% of South Korea’s GDP over 2021-2030 and 5% over 2030-2040 Incremental Capital Output Ratio* Financial Services Commission (2014) USD500b 20 years Economic costs of bringing North Korea’s per capita GDP (post-unification) to USD10,000 in 20 years Source: KDB (2017), Financial Services Commission (2014) 26 (Ancillary information) Key institutions' cost projections (item-by-item method) Methodology Institution/ Author Unification cost estimation Expenditure period (after unification) Notes Item-by-item Samsung Economic Research Institute (2005) KRW545.8t 10 years Includes cost of raising North Korean citizens' basic livelihood and launching industrialization in North Korea Item-by-item Kim Yoo-Chan (2010) KRW2,257.2t 20 years Includes cost of offering North Korean citizens basic livelihood/medical services/government services, and making infrastructure investments in North Korea 10 years Includes cost for integrating political/administrative/judicial systems, and integrating economic systems; includes cost of strengthening North Korea's basic livelihood and social security system 20 years Includes cost of integrating the two Koreas' industrial/trade/energy sectors, agriculture/forestry/food sectors, and infrastructure sector 40 years Includes cost of raising North Korea's income (per capita GNI) to 66% the level of South Korea's via expansion of humanitarian support for the north (eg, food and medical services) over 2016-2025 Item-by-item Korean Association of Public Finance (2011) Item-by-item Cho Han-bum et al (2013) Item-by-item National Assembly Budget Office (2015) KRW223.6t-848.3t KRW581.8t KRW3,100t Source: KDB (2017) 27 (Ancillary information) Key institutions' cost projections (growth accounting method) Topics Contents (or hypothesis) Set a goal for North Korea's economic reconstruction To raise North Korea's per capita GDP to USD10,000 by 2036 (which should be equivalent to 30% of South Korea's 2036 figure, based on real prices in 2010) Reconstruction period for North Korea (= reconstruction-cost spending period) 20 years (2017-2036) Projected economic growth for North Korea during the period North Korean economic growth to mirror South Korean economic growth over 1976-1995 North Korea's population growth during the period to be similar to Statistics Korea’s projection in 2010 Reconstruction period Reconstruction cost projections* 10 years (2017-2026) USD377.3b (KRW428.1t) 20 years (2017-2036) USD621.5b (KRW705.1t) 30 years (2017-2046) USD1,094.1b (KRW1,241.3t) Note: * As of 2010 constant prices, 2017 average exchange rate (KRW1,134.47/USD) Source: KDB (2017) 28 II. North Korea's economic reconstruction and funding dispute II-1. Flawed premises in previous projections of reconstruction costs II-2. Japanese reparations to be seed money for reconstruction II-3. International agencies to provide initial funding Japanese war reparation to be seed money for reconstruction of North Korea Summary ▶ Surrender of Japan in World War II and reparations over 1945-1946: The Allied Powers' Far East Committee (comprising nine countries) imposed outrageous reparations on Japan. The committee: 1) benchmarked the reparations demanded of Germany under the 1919 Treaty of Versailles; and 2) aimed at returning the Japanese economy to its level of 1930 or 1934. In Japan, the war industry was completely dismantled and 506 related plants were demolished by 1946. Some 55% of the machinery and equipment in such facilities was distributed to China, 11% to the Netherlands, 19% to the Philippines, and 4.5% to the UK. Meanwhile, the Allied Powers also divided between themselves Japan’s machinery and equipment located in occupied territories. ▶ Reparations plan altered by spread of communism: The US, believing a post-war economic recovery in Japan was crucial to the stability of Northeast Asia, formulated a new reparations plan and proposed revised distribution ratios in May 1947. China, the UK, the Soviet Union, and the Philippines opposed this, but the San Francisco Peace Treaty of 1951 allowed Japan to pay war reparations via bilateral talks and treaties, with the stipulations that: 1) the amount of reparations would be set in consideration of Japan’s ability to pay; and 2) the means and timing of reparation payments would be determined in bilateral talks with Japan. ▶ Usage of Japanese war reparations: Most countries funneled the compensation into reconstructing social infrastructure damaged and destroyed during WWII. Some of the reparations were squandered as a result of inefficient investments and arbitrary allocation, but South Korea is widely regarded as the nation that used the reparations the most effectively for plan-driven development. Over 19661975, South Korea received USD300m from Japan and borrowed a further USD200m. It plowed 56% of this into mining and manufacturing, 18% into social infrastructure, and 8% into agriculture and forestry. ▶ North Korea’s war reparations: North Korea is likely to highlight war reparations when it normalizes diplomatic relations with Japan. In a 2002 peace agreement, North Korean leader Kim Jong-Il and Japanese Prime Minister Junichiro Koizumi reportedly agreed to around USD10b in reparations. The compensation could be used as seed money only if combined with thorough planning and preparation for effective use. In negotiations, the North needs to convince Japan to pay reparations more quickly and weight payments towards the early stages. However, some have expressed concerns that Japan may take advantage of the North’s demand for reparations by exerting excessive influence. 30 Defeat of Japan in WWII and reparations (1945-1946) Reparations imposed on Japan were punitive ▶ The plan and management of Japanese war reparations for the Allied Powers was handled by the Far East Committee, which consisted of the US, the UK, the Soviet Union, Australia, the Netherlands, Canada, France, India, and the Philippines. Key content ▶ Benchmarked German reparations (as conceived in the 1919 Treaty of Versailles) ▶ Aimed at returning Japanese economy to its level of 1930 or 1934 ▶ Allowing Japan to maintain the bare minimum level of economic facilities In Japan, the war industry was completely dismantled, and 506 plants were demolished by 1946. Some 55% of the recovered machinery and equipment in those facilities was distributed to China, 11% to the Netherlands, 19% to the Philippines, and 4.5% to the UK. Meanwhile, the machinery and equipment in all of Japan’s plants in its occupied territories was distributed among the Allied Powers. 31 Reparations plan altered by spread of communism US viewed Japanese post-war economic recovery as crucial to stability in Northeast Asia ▶ Reparations via plant stripping came to a halt and a new plan for compensation began to form. ▶ 30% discount to initial reparation plan ▶ China, the UK, the Soviet Union, and the Philippines opposed the adjusted distribution ratios in May 1947. Compensation plan suggested by US in 1947 Nation Portion of reparations Nation Portion of reparations US China Philippines Australia UK India 34% 27% (40%) 8% (15%) 8% 8% (25%) 6% Netherlands Russia Canada New Zealand France 3% 2% (15%) 1.5% 1.5% 1% Note: Numbers in parenthesis are proportions suggested by each country 32 San Francisco Peace Treaty (Sep 4, 1951) Participants: Japan and 49 other countries ▶ Japan to agree exact war reparations following bilateral talks and treaties with each nation. ▶ The Philippines and Vietnam claimed reparations in accordance with this agreement. Indonesia, Myanmar, and South Korea followed suit ▶ Some countries (eg, China, Cambodia, and Laos) renounced their demands for war reparations Afterwards, Cambodia and Laos received grants and loans from Japan under agreements on economic and technology cooperation War reparations covered by several articles in treaty ▶ Article 14: …it is recognized that the resources of Japan are not presently sufficient, if it is to maintain a viable economy, to make complete reparation for all such damage and suffering and at the same time meet its other obligations. Therefore, Japan will promptly enter into negotiations with Allied Powers…with a view to assisting to compensate those countries for the cost of repairing the damage done, by making available the services of the Japanese people in production, salvaging and other work for the Allied Powers in question. Each of the Allied Powers shall have the right to seize, retain, liquidate or otherwise dispose of all property, rights and interests of japan and Japanese nationals. But Allied Powers waive all reparations claims of the Allied Powers and other claims of the Allied Powers and their nationals arising out of any actions taken by Japan and its nationals in the course of the prosecution of the war. ▶ Article 15: …Japan will, within six months of the date of application, return the property, tangible and intangible, and all rights or interests of any kind in Japan of each Allied Power and its nationals which was within Japan at any time between Dec 7 1941 and Sep 2 1945. ▶ Article 21: Korea [shall be entitled] to the benefits of Articles 2, 4, 9 and 12 of the present Treaty This means… …Japan recognizes the independence of Korea, renounces all right, title and claim to Korea… …and shall provide Korea most-favorednation treatment or national treatment with respect to trade talks or negotiations for other commercial relations. 33 San Francisco Treaty: Characteristics of war reparations Background ▶ With communism gaining ground in the Asian region, the US began to view Japan as its partner in curbing the spread of communism. The necessity to nurture Japan's economic development resulted in war reparation arrangements that were advantageous to the defeated country. Characteristics of war reparations under San Francisco Peace Treaty ▶ The level of reparations was set in consideration of Japan's ability to pay because the immense reparations demanded of Germany following WWI wrought havoc on the German economy and ultimately triggered a global recession. Furthermore, Japan was given a long time to pay and did not have to pay in a lump sum. ▶ The level, method, and timing of reparations were determined according to bilateral talks with Japan and also in consideration of Japan's financial situation. ▶ Reparations were also to be paid in products and services useful to promoting the economic recovery, development, and social welfare of creditor countries. 34 (Ancillary information) War reparations in the past South Korea Myanmar (Burma) Philippines Indonesia Vietnam Agreement 1965 1954 1956 1958 1959 Total amount USD300m USD200m USD550m USD223m USD39m Period 10 years 10 years 20 years 12 years 5 years 1-11 years: USD20m 1-3 years: USD10m 12 year: USD3m 4-5 years: USD7.5m Increase impossible Increase impossible 1-10 years: USD25m USD30m Amount per year Increase possible USD20m according to Increase agreement between impossible the two countries 11-20 years: USD40m Increase possible according to agreement between the two countries Source: Ministry of Strategy and Finance (1976) 35 Usage of reparations paid by Japan Japanese war reparations were invested to rebuild infrastructure and promote industries with comparative advantages ▶ Most countries funneled the compensation into reconstructing social infrastructure (including dams, roads, harbors, and railways) damaged or destroyed during the war. ▶ But, some of the reparations were squandered as a result of inefficient investments and arbitrary allocation. Usage of reparations and assessment ▶ Indonesia Plywood, in which the country had a comparative advantage Hotels and department stores—criticized as inefficient investment ▶ The Philippines Cement, in which the country had a comparative advantage A large portion of reparations was used to buy vessels Transportation capacity rose sharply on the use of reparations to fund railways, roads, and vessels ▶ Burma Invest in basic industries (eg, building power plants) and education (eg, technical training) ▶ Vietnam Hydroelectric power plants and consumer-oriented light manufacturing ▶ South Korea—reparations used most effectively to achieve plan-driven development A large portion of the reparations was used to purchase raw materials, because the country relied heavily on the processing trade due to a lack of natural resources 36 (Ancillary information) Korea's right to demand compensation from Japan Compensation received, by year (USD’000, %) Reparations Amount 1966 1967 1968 1969 1970 1971 1972 39,915 34,668 27,979 24,059 25,995 29,205 29,798 Use of compensation, by industry Loans (%) 13.3 11.6 9.3 8.0 8.7 9.7 9.9 Amount 44,677 27,389 17,813 11,070 8,894 8,000 34,900 (USD’000, %) Total (%) Amount (%) 22.3 84,592 16.9 13.7 62,057 12.4 8.9 45,792 9.2 5.5 35,129 7.0 4.4 34,889 7.0 4.0 37,205 7.4 17.5 64,698 12.9 1974 29,613 28,016 9.9 2.5 34,617 6.9 9.3 1975 30,752 10.3 Total 300,000 100.0 Source: Ministry of Strategy and Finance (1976) 5,004 41,521 20.8 69,537 13.9 732 200,000 31,484 6.3 100.0 500,000 100.0 Total (%) Amount (%) Amount (%) Agriculture 36,548 12.2 2,309 1.2 38,857 7.8 Fishing 27,176 9.1 27,176 5.4 Mining 164,263 54.8 277,988 55.6 20,125 6.7 20,125 4.0 6,029 2.0 89,995 18.0 45,729 15.2 45,729 9.1 130 0.0 130 0.0 300,000 100.0 500,000 100.0 Science Technology Infrastructure Bank fees 0.4 Loans Amount Settlement account 1973 Reparations Total 113,725 83,966 200,000 56.9 41.9 100.0 Source: Ministry of Strategy and Finance (1976) 37 North Korea's war reparations and likely usage Japan in 2002 reportedly agreed to pay USD10b in reparations to North Korea ▶ North Korea was rumored to have demanded reparations in the order of USD30b-40b, which included compensation for ‘comfort women,’ forced labor, assets confiscated by Japan, and related interests. ▶ Japan reportedly proposed reparations of USD10b (or USD20b at present value adjusted for PPI and CPI). Sankei Newspaper on Sep 18, 2002 reported a rumor that North Korean leader Kim Jong-il and Japanese Prime Minister Junichiro Koizumi during a peace agreement had settled on a level of reparations that would be provided in the form of official development assistance Probable usage ▶ Reconstruction of social infrastructure and investment in basic sectors (steel) and industries (eg, textiles and natural resources) in which North Korea has comparative advantages ▶ Agriculture and fishing industries for the purpose of stabilizing daily living expenses of North Koreans ▶ Thorough planning and preparation essential for effective use of reparations ▶ Demand to shorten period of reparation payment Negotiations to boost portion of reparations paid in early stages Possible points of controversy ▶ Japan may seek to leverage the reparation payments to exert excessive influence on North Korea Such concerns could be eased by South Korea or China offering guarantees when North Korea takes loans from international organizations ▶ Reparations may be used for things other than economic development Verification process for usage of reparation necessary 38 (Ancillary information) North Korea's economic scale and composition Economic scale (nominal GDP) Industrial composition of GDP (2016) (KRWt) Services (nongovernment) 8% 37 35 Services (government) 29% Kim Jong-il died 33 Agriculture & fishing 20% Mining 11% 31 29 Light manufacturing industry 6% 27 Construction 8% 25 2010 2011 2012 2013 2014 2015 2016 Note: It is inappropriate to compare nominal GDP directly with another country’s because North Korea's nominal GDP was calculated with south Korea's price index and exchange rate Source: BOK Utilities 5% Heavy manufacturing industry 13% Note: It is inappropriate to compare nominal GDP directly with another country’s because North Korea's nominal GDP was calculated with south Korea's price index and exchange rate Source: BOK 39 II. North Korea's economic reconstruction and funding dispute II-1. Flawed premises in previous projections of reconstruction costs II-2. Japanese reparations to be seed money for reconstruction II-3. International agencies to provide initial funding North Korea: Attracting overseas & private-sector funding Summary ▶ International community's financial assistance: If North Korea becomes a normal nation, it should be able to access financial resources from the international community. Classified as the world's poorest nation, North Korea could apply for grants from individual countries or international financial agencies. If it becomes a middle-income nation, it would be eligible for official development assistance (ODA)—the official and concessional part of capital flows. South Korea could play a leading role in creating trust funds for North Korea for economic development there. Details Features ODA International financial agency Trust fund • Governments worldwide provide assistance or loans to developing nations for economic development • IMF, World Bank, ADB, AIIB, etc provide grants and concessional loans to developing nations • South Korea, related nations, and international financial agencies create trust fund via capital contributions • Eligible for funding only when a recipient country is a member of international financial agencies • Eligible only when a recipient country meets certain conditions • Eligible even when a recipient country is not a member of international financial agencies • UNDB and international organizations mange funds → method preferred by countries/ regions that think highly of business transparency (eg, EU) • Divided into bilateral and multilateral aid → Recipient countries and aid amounts depend on donor countries' assistance goal and related regulations 41 Foreign investment possible only after North agrees to denuclearize UN sanctions need to be lifted if normal transactions and investments are to become possible ▶ Nuclear negotiations must result in North Korea agreeing to denuclearization if sanctions are to be lifted Sanctions Related resolution Initiated Problems to inter-Korean economic cooperation Prevent financial trade between UN member states and North Korea* Resolution 2270, provisions 32, 33, 35 Resolution 2321, provisions 31, 33 Mar 2016 Practical difficulties increase with financial channel blocked, causing excessive transaction costs Prevent public and private financial support for trade with North Korea Resolution 2321, provision 32 Nov 2016 South Korean government support for economic cooperation (eg, insurance or loans) becomes impossible. Considering political risk of economic cooperation, private business participation hardly expected without government backing Prevent trade of minerals, basic metals, and marine products from North Korea Resolution 2371, provisions 9-11 (strengthen resolutions 2270 and 2321) Aug 2017 Difficulties of inter-Korean trade except North Korean products with merchantable quality Source: * Excludes humanitarian aid and trade for diplomatic purposes 42 Overseas funding methods for North Korea From official development assistance (ODA) ▶ Assistance provided by public agencies (including governments) to developing nations to promote economic development ▶ Includes capital and technology cooperation given to developing nations' governments and regions, and international organizations ▶ Bilateral aid tailored to country-specific conditions From international financial agencies ▶ IMF, World Bank, ADB, AIIB, etc provide grants and concessional loans to developing nations ▶ Types of aid and conditions differ by agency ▶ Amount of aid limited in initial phase of membership From trust fund ▶ South Korea and related nations can create trust funds via capital contributions, with the funds receiving aid from World Bank and international agencies ▶ North Korea eligible for trust funds even though not a member of international financial agencies; membership to allow the nation to receive funds, equivalent to the aid 43 Funding through ODA ODA: concessional loans from developed nations to developing ones for economic development ▶ Overseas aid from developed nations; overseen by OECD's development assistance committee (DAC) As of 2016, ODA totaled USD143.0b, of which 55% were given to social/economic infrastructure establishment ▶ DAC studies ways to provide economic cooperation to developing nations; conducts internal screening for aids to developing nations ▶ DAC comprised of 24 nations including the EU, the US, Japan, and South Korea; IMF/IBRD participating as observers ODA beneficiaries, by region ODA weightings, by sector Europe 3% Other Debt related support 0% 1% Material support/general program aid 5% Administrative cost 5% Not designated 36% Africa 28% Aid for refugee 6% Social infrastructure and service 35% Production 8% Humanitarian aid 10% America 6% Oceania 2% Note: Based on 2015 bilateral aids agreement Source: OECD Asia 25% Multi-sectoral 10% Economic infrastructure and service 20% Note: Based on 2015 bilateral aids agreement Source: OECD 44 Funding through ODA, by nation US ▶ The US’s assistance-to-GDP ratio stands at less than 0.2%, low among DMs. However, the nation is the world’s leading donor nation in absolute terms, with the 2009 figure hitting USD28.8b ▶ The US utilizes overseas aid as a means to boost its security needs, realize its economic policy goals, and bolster its corporate earnings ▶ Foreign Assistance Act: The US has laws in place to stop institutions from providing government assistance to nations with poor human rights Prohibits agencies (eg, the US Agency for International Development (USAID), the IMF, World Bank, and ADB) from assisting North Korea ▶ But the US providing economic assistance to North Korea should mark the normalization of bilateral relations This development should encourage Japan and EU members (ie, countries that are strongly influenced by the US) to support: 1) investments in North Korea; and 2) North Korea being accepted by international financial agencies Japan ▶ Japan is likely to provide ODA to North Korea when the two nations establish relations—such a fund may prove to be a key part of North Korea’s overseas funding ODA provisioning has already been agreed (at the North Korea-Japan Summit in 2002) ▶ Japan’s ODA (to the North) is expected to outweigh the US’s aid to North Korea ▶ Concessional loans and aid to Asia take up a large chunk of Japan’s bilateral aid ▶ Most of Japan’s bilateral aid goes to China, and opposition to this is high Aid that is currently sent to China will likely be redirected towards North Korea (when relations are established) ▶ Japan’s ODA is geared towards the construction of economic infrastructure 45 Funding through ODA, by nation China ▶ North Korea’s biggest donor nation is China. Aid flows currently focus on sustaining the North Korean regime Chinese firms’ investments in North Korea are driven by a desire for short-term gains—they want to secure natural resources (eg, coal and iron ore) as well as a market for low-priced light industry products (that are made in China) ▶ China’s support for North Korea comes in the form of ODA as political and security ties between the two nations are weakening ▶ China’s overseas aid is far different from that agreed upon among OECD’s DAC members China supplies unconditional large-scale aid to corrupt governments in order to secure interests in natural resources. It stopped sending aid to Vietnam when the possibility of excluding Taiwan from an APEC Summit was rejected by Hanoi Russia ▶ Its overseas aid system is weak and its aid budget is limited → Russia is unlikely to give large-scale direct support to the North ▶ Russia is well aware of the need to develop its Far East and Siberia alongside North Korea Russia’s Far East is plagued by low economic growth, a falling population, and inferior infrastructure, though it does hold ample natural resources. The region suffers massively inferior economic development (vs other Russian regions) ▶ Modernization of North Korean railways: cooperation to center on Trans-Korean and Trans-Siberian Railway projects To first modernize the Najin and Hasan railway lines and develop the harbor at Najin—these three proposals have already been discussed The country is unlikely to be aggressive towards modernizing North Korea’s railway infrastructure due to its own fiscal problems. We expect the country to participate in the development of North Korea via international consortiums ▶ To participate in projects beneficial to Russia (eg, laying natural gas pipelines between the two Koreas and Russia) EU ▶ Assistance to be given to laying social/economic foundations (vs establishing physical infrastructure) ▶ Prefers trust funds and international agency-driven overseas aid (for better transparency and efficiency) ▶ ODA from Europe (including the European Commission and EU members) is the largest in the world (USD67.4b in 2009) ▶ The debt repayment burden on distributed aid/loans is particularly low ▶ Likely to serve as a broker of multilateral aid as its political and security burden is not as high as the US’s and Japan’s 46 Funding from international agencies A recipient country is eligible for funding through membership in international financial agencies (eg, the IMF and World Bank) ▶ Agencies provide development finance, grants, and technology support to low-income countries → thus, they finance the nations’ development policies ▶ Capital for this basically comes in the form of bilateral aid (where political/diplomatic situations are taken into account). The aid amount also depends on income level, debt repayment record, and economic policy of the recipient countries—this marks a big difference from the ODA ▶ Membership requires agreement to a certain level of economic reform and consent from member nations To win IMF membership, a nation should contribute subscribed capital and win approval from more than 50% of member nations. IMF membership automatically provides IBRD and IDA membership To secure ADB membership, a nation should win two thirds of member nations’ support (which have three fourths of total voting rights) → support from the US and Japan (which together hold one fourth of total voting rights) is essential Early membership is unlikely. The initial aid amount looks set to be limited ▶ Membership requires consent from the US and Japan as well as preparation (on the part of North Korea) North Korea will have to make considerable effort in order to meet membership requirements It usually takes at least 3-4 years for a potential member to win project loans (a normal type of financial support) ▶ World Bank or ADB membership would allow North Korea to win IDA or ADF (types of grants) given its per-capita income and debtrepayment capability ▶ The IDA puts a 80% weighting on the actual performance of policy measures relating to restructuring and the environment Assistance to North Korea is expected to be limited for the time being as its initial performance score would likely be low ▶ The IMF’s poverty reduction and growth facility (PRGF) would inevitably be linked to North Korea’s subscribed capital Assistance would be capped at 140% of the subscribed capital amount or up to 185% in exceptional cases and only when there is approval from the IMF’s Executive Board 47 Funding programs at international financial organizations IMF: Poverty Reduction and Growth Trust (PRGT) ▶ Eligibility: Countries with per-capita income below USD1,215 (as of 2016) or those lacking access to international financial markets Extended Credit Facility (ECF) ▶ Purpose: To move towards a stable and sustainable macroeconomic position consistent with: 1) strong and long-lasting poverty reduction; and 2) economic growth. To help catalyze additional foreign aid ▶ Duration: Initial duration 3-4 years; maximum duration 5 years ▶ Access: Total access to concessional finances under PRGT: 75% of quota per year Total outstanding concessional credit: 225% of quota Standby Credit Facility (SCF) ▶ Purpose: To support low-income countries that have reached broadly sustainable macroeconomic positions, but may experience episodic short-term financing and adjustment needs, including those caused by internal or external shocks ▶ Duration: 12-24 months; maximum 30 months ▶ Access: Total access to concessional finances under PRGT: 75% of quota per year Total outstanding concessional credit: 225% of quota Rapid Credit Facility (RCF) ▶ Purpose: To provide low-access, rapid, and concessional financial assistance to low-income countries with urgent balance of payments, without ex post conditionality ▶ Duration: One-off disbursement ▶ Access: Total access to concessional finances under PRGT: 18.75% of quota per year Total outstanding concessional credit: 75% of quota 48 Funding programs at international financial organizations ADB Ordinary Capital Resources (OCR) ▶ Purpose: Regular market-based loans are issued to help develop nations that have attained a higher level of economic development Concessional loans: to fund lower-income countries ▶ Eligibility: 18 member states including Afghanistan, Bhutan, Cambodia, Kiribati, Kyrgyz Republic, Lao People’s Democratic Republic, Maldives, Marshall Islands, Federated States of Micronesia, Myanmar, Nauru, Nepal, Samoa, Solomon Islands, Tajikistan, Tonga, Tuvalu, and Vanuatu These countries fall under one of three groups based on the risk of debt distress: 1) grants; 2) ADF-blend (can access both ADF grants and concessional OCR loans); and 3) concessional OCR loans Asian Development Fund (ADF) ▶ Purpose: To provide grants to lower-income developing countries; promote poverty reduction and improvements in the quality of life in poorer countries in Asia and the Western Pacific region ▶ Duration: Grants only 49 Funding programs at international financial organizations World Bank International Bank for Reconstruction and Development (IBRD) ▶ Purpose: To help lower/middle-income nations ensure that progress in reducing poverty and broadening prosperity is sustained ▶ Eligibility: Countries with a per capita gross national income between USD1,165-6,895 (as of 2016) ▶ Maturities: Maximum 35 years; average maturity limit of 20 years International Development Association (IDA) ▶ Purpose: To reduce poverty by providing loans and grants for programs that boost economic growth, reduce inequality, and improve living conditions ▶ Eligibility: Countries with GNI per capita below USD1,165 (as of 2016) ▶ Maturities: Maximum 40 years 50 Funding programs at international financial organizations AIIB Target and method of support ▶ Target: Members, organizations, and political institutions located in members’ territories. International organizations related to economic development in Asia ▶ Method of support: Government-guaranteed loans, non-guaranteed loans, reserves for government-guaranteed projects Principle and procedures ▶ Core principle: Economic feasibility, transparency, effectiveness, optimization, efficiency, fairness, suitability ▶ Procedures: Based on beneficiaries’ project delivery strategies, which include funding methods, schedule, and related information AIIB: Investment target and source of investment Type of investment target Details of the target Intelligent infrastructure Broadband internet, optical fiber cables, satellite service facilities SOC Source of investment Transportation Roads, bridges, waterways, harbors, airports Energy Power plants, power transmission lines, pipelines for oil and natural gas City development Drinking water and sewage disposal, garbage disposal, heating & cooling Logistics, retail Warehouse, delivery Government investment Authorized capital stock of AIIB Special fund eligible for AIIB members Funds from multilateral development banks such as the ADB, World Bank, and EBRD 51 Establishment of trust fund for North Korea (proposal) To allow North Korea to access capital even before it becomes a member of international financial agencies ▶ South Korea (and other nations) can create trust funds via capital contributions, which should allow North Korea to win assistance from the World Bank and international agencies To lay the foundations for receiving technological support and infrastructure development funds from the World Bank, ADB, and AIIB Trust funds are usually managed by the World Bank or UNDP ▶ To allow North Korea to access capital before it joins international financial organizations ▶ Key examples: The World Bank’s Palestine Recovery and Development Program Trust Fund; East Timor Development Fund Multi-sided trust model Governing committee Secretariat A Secretariat BoD Project committee Project A Project B Project C Project D Project A Project B BoD A BoD B Governing committee A Governing committee B Project committee A Project committee B Project C Project D Project A Project B Secretariat B One-sided trust model Project C Project D 52 III. North Korea’s economic reconstruction and related opportunities III-1. Kim Jong-un’s first five-year economic development strategy III-2. Assessment of North Korea’s infrastructure III-3. North Korea’s economic reconstruction projects III-4. Economic development zones and specially designated zones first to open III-5. Wonsan-center of attention Kim Jong-un’s first five-year economic development strategy Summary ▶ Five-year strategy for economic development with nonspecified goals: The 7th congress of the Workers’ Party in 2016 adopted a five-year strategy to develop DPRK’s economy. Unlike a ‘plan’ (that is usually legally bound, spans short and long periods, and involves specific numerical goals), a ‘strategy’ covers mid- to long-term periods, is largely symbolic, and has little legal authority. Kim Jong-un has established an economic development strategy. It lacks specific goals due to strong sanctions from the international community, and nuclear development is one of its prime goals. ▶ Ramifications: Despite the haziness of the intended goals, we see the strategy as having two primary targets, to develop: 1) a strong self-sufficient economy (based on self-dependence, and science- and technology-based productivity; and replacing light industry imports with domestically-made products to improve people’s quality of life); and 2) a knowledge-driven strong economy (developing the economy via its own technological advancements without relying on foreign countries; and localizing the production of raw materials and intermediate goods in order to develop light industries). ▶ Three focus areas: The first task is to improve people’s quality of life. For this goal, to solve the nation’s energy problems, normalize upstream industries (eg, coal extraction and metal production), basic infrastructure (eg, railways), basic industries (machinery, chemical, construction, and construction materials), and increase agricultural, fishery, and light industry production are required. The second task is to develop the nation’s land in a sustainable manner by restoring forests, protecting the environment, and preventing air and water pollution. The third task is to boost international economic activity, which includes improving the country’s trade structure (boosting high value-added exports), introducing modern technology, and promoting tourism. ▶ Keywords for future inter-Korean economic cooperation: The five-year economic development strategy helps predict the priorities for North Korea’s economic reconstruction. Electricity, rail, construction, exports, mining, tourism, forests, and advanced technology are keywords that should help investors pick promising industries and companies. 54 Major actions at DPRK’s Workers’ Party Congress The 7th Congress adopted Kim Jong-un’s economic development strategy (though specific goals are lacking) ▶ The 3~5th economic development plans had detailed policy goals ▶ ‘Plan’ is used to signify something that is legally bound for all time periods and involves detailed numerical goals ▶ ‘Strategy’ is only symbolic and has little legal power Congress of the Workers’ Party of Korea Content Aug 28th - 30th, 1946 Adopt doctrine and rule of Workers’ Party of Korea Mar 27th - 30th, 1948 Kim Il-sung elected as vice-chairman of the Party Apr 23th - 29th, 1956 5-year plan of economic development Kim Il-sung elected as chairman of Central Committee of the Party Sep 11th - 18th, 1961 7-year plan of economic development Kim Il-sung elected as chairman of Political Committee of the Party Nov 2th - 13th, 1970 6-year plan of economic development Formally adopted Juche ideology Oct 10th - 14th, 1980 1980s: 10 goals for economic development Kim Jong-il elected as member of Committee of the Party May 6th - 9th, 2016 5-year economic development strategy Kim Jong-un elected as chairman of the Worker’s Party of Korea Source: Kim Il-song’s wiriting, Ministry of Unification 55 Kim Jong-un’s dilemma The regime’s primary goal is survival via nuclear development ▶ The 2016 economic development strategy lacks specific goals due to the impact of strong sanctions from the international community (including the US) Goals Detailed action plans 5-year plan (1957-1961) Establish grounds for socialist industrialization and address basic needs (food, clothing, and housing) Set production targets for steel, coal, chemical fertilizers, fabric, and shoes Set production targets for fisheries and meat Electricity generation target of 8.5b kwh 1st 7-year plan (1961-1967) Adopt modern technology in every part of the economy and improve living standards Set production targets for steel, fiber, synthetic resin/rubber, and cement Set production target for tractors Electricity generating capacity target of 2m kw 6-year plan (1971-1976) Develop technologies based on industrialization and strengthen technological foundations Convert 60~70% of the economy into manufacturing (using domestically-sourced raw materials) 2nd 7-year plan (1978-1984) Strengthen socialist economic foundations and improve people’s quality of life Set production targets for industrial production, electricity generation, coal, iron ore, steel, chemical fertilizers, cement, and household goods 3rd 7-year plan (1986-1992) Lay the groundwork for a total socialist victory Industrial and agricultural production to increase 1.9x and 1.4x, respectively 5-year strategy (2016-2020) Construct a strong economy Symbolic gesture without specified goals Source: Kim Il-song’s writing, Ministry of Unification 56 Kim Jong-un’s five-year economic development strategy (2016-2020) Dual focuses ▶ Strong, self-sufficient economy based on self-dependence, and science- and technology-based productivity ▶ Economic development via its own technological advancements without relying on foreign countries Strategic action plans ▶ Self-sustaining, modernized, information-driven, and industrialized economy. Forge a path via utilizing the nation’s brawn and domestically-sourced technology Goals ▶ Strong self-sufficient economy ▶ Knowledge-driven robust economy 57 What is a strong self-sufficient knowledge-driven economy? Make industrialization a top priority for economic development ▶ Replace light industry imports with locally-made items to improve people’s quality of life ▶ Localize raw materials and intermediate goods and enable the North to develop heavy industries by itself Action plans Self-sufficient economy Modernization Localize raw materials and equipment production Develop manufacturing processes that use locally-sourced raw materials Introduce state-of-the-art facilities Aggressively develop major resources (such as oil) Make self-sufficient in food production Boost food production Improve economic structure via local production Seek balanced development Develop mining areas Strategic targets Make manufacturing processes automated and smarter Knowledge-driven economy (based on information Action plans + science) Raise high-tech industry portion as part of economic development 58 Major action plans of Kim Jong-un’s five-year economic development strategy Improve people’s quality of life ▶ The primary task is to solve the nation’s energy problems ▶ There is a need to normalize upstream industries (eg, coal extraction, metal production), infrastructure (eg, railways), and basic industries (machinery, chemical, construction, and construction materials) ▶ Efforts should be made to increase agricultural, fishery, and light industry production Develop land in a sustainable manner ▶ Restore forests, protect the environment, and prevent air and water pollution Boost international economic activity ▶ Improve the nation’s trade structure—more focus needs to be given to export processed goods. The technology and service portion of trade should be increased ▶ Boost high value-added exports by processing mined resources ▶ Introduce advanced technologies via joint operations and joint ownerships ▶ Promote tourism 59 Keywords for future inter-Korean economic cooperation hinted at by Kim Jong-un’s economic development strategy Chemical Construction Materials Metal Coal Quality of life of people Economy Railroads Regional construction & environment Electricity Prevent pollution Air Rivers Sea Forests Exports Technology Services Natural resource Value-added Tourism Joint corporation Protect the environment 60 III. North Korea’s economic reconstruction and related opportunities III-1. Kim Jong-un’s first 5-year economic development strategy III-2. Assessment of North Korea’s infrastructure III-3. North Korea’s economic reconstruction projects III-4. Economic development zones and specially designated zones first to open III-5. Wonsan-center of attention Assessing infrastructure in North Korea Summary ▶ Lack of data to assess infrastructure: The World Economic Forum’s (WEF) annually-published Global Competitiveness Index (GCI) gives scores for infrastructure (both overall and for various infra segments), which are computed via a survey. However, there is no such score for North Korea, making it difficult to assess: 1) the degree of infrastructure development in the nation; and 2) the nation’s infra needs (to facilitate inter-Korean economic cooperation). ▶ Estimate North Korea’s infrastructure score based on regression analysis: We identified factors that show strong correlation with each infrastructure segment (used by the WEF: roads, railroads, ports, airports, and electricity generation) and conducted regression analysis to get a rough idea of North Korea’s infra scores. We estimate that North Korea would rank 41th (among 46 countries included in the WEF’s GCI), believing that the country has very poor infrastructure. ▶ North Korea’s infrastructure strength in relative terms: North Korea’s main infrastructure is in disrepair as its economic woes in the 1990s made it difficult to maintain and repair basic systems. Importantly, railroads show a relatively high score because the regime founder (Kim Il-sung) focused on the segment, which is a favored form of transportation in mountainous nations such as North Korea. Although its railways are dilapidated, North Korea still heavily depends on them—trains move 90% of the nation’s cargo and 62% of passenger trips are taken by train. ▶ Set investment priorities based on infrastructure assessment: We believe that North Korea has a strong need to revitalize its railways (eg, lay double-tracks and add new lines) given the degree of disrepair, after which its port facilities should be upgraded (given its likely trade and tourism aspirations), and then airports should be constructed (and others renovated). Meanwhile, demand for roads varies by region. For example, west-coast regions likely have a greater demand for roads (vs eastcoast regions), and industrial areas likely urgently need road-related investments for logistical reasons. 62 North Korea’s infrastructure score North Korea ranked 41st out of 46 countries based on World Economic Forum’s criteria ▶ Railroad is relatively well-developed, although its quality is lagged behind Country Road Paved road length Railroad Relative to area Score (km) Freight, passenger traffic (mil ton*km, mil person*km) Port Relative to area Score Container traffic Air transport Relative to population Score (TEU) Air cargo traffic Electricity Relative Score to population (mil ton*km) Final score Electric power Score consumption per capita (kWh) Railroad included Railroad excluded South Korea 92,795 0.95 5.56 Freight 9,564 Passenger 23,071 0.33 5.66 26,373,000 521,271 5.25 11,485 227.00 5.88 10,497 6.41 5.75 5.77 China 4,046,300 0.43 4.58 Freight 2,308,669 Passenger 807,065 0.33 4.80 199,565,501 142,850 4.56 21,305 15.25 4.90 3,927 4.98 4.76 4.75 148,338 0.48 3.37 Freight 4,252 Passenger 4,253 0.03 2.96 8,495,730 90,794 3.67 459 4.91 3.75 1,411 4.34 3.62 3.78 724 0.01 3.03 Freight 9,100 Passenger 3,400 0.10 4.13 130,789 5,181 3.10 0.23 0.01 3.51 600 3.74 3.50 3.34 Vietnam North Korea Road Railroad Rank Country Score Rank Port Country Score Rank Country Score 36 Bulgaria 3.36 12 Russia 4.55 36 Argentina 3.72 37 Argentina 3.28 13 Lithuania 4.39 37 Vietnam 3.67 38 Brazil 3.12 14 Latvia 4.24 38 Bangladesh 3.62 39 Bangladesh 3.07 15 Indonesia 4.23 39 Mozambique 3.57 40 Latvia 3.05 16 Portugal 4.22 40 Romania 3.53 41 North Korea 3.03 17 North Korea 4.13 41 Ukraine 3.48 42 Russia 2.90 18 Estonia 4.11 42 Algeria 3.44 43 Romania 2.70 19 Italy 4.08 43 Tunisia 3.34 44 Mozambique 2.47 20 Ukraine 3.94 44 Brazil 3.15 45 Ukraine 2.44 21 Morocco 3.90 45 North Korea 3.10 46 Congo DR 2.06 22 Georgia 3.84 46 Congo DR 2.70 Air transport Rank Electricity Country Score Rank Overall infrastructure Country Score Rank Country Score 36 Pakistan 3.98 36 Indonesia 4.43 36 Ukraine 3.66 37 Ukraine 3.96 37 Turkey 4.40 37 Algeria 3.65 38 Brazil 3.93 38 Vietnam 4.34 38 Pakistan 3.64 39 Tunisia 3.90 39 Algeria 4.20 39 Vietnam 3.62 40 Vietnam 3.75 40 South Africa 3.92 40 Romania 3.60 41 Iran 3.73 41 North Korea 3.74 41 North Korea 3.50 42 Algeria 3.69 42 Bangladesh 3.65 42 Brazil 3.34 43 North Korea 3.51 43 Argentina 3.01 43 Bangladesh 3.32 44 Mozambique 3.45 44 Mozambique 2.97 44 Argentina 3.26 45 Bangladesh 3.34 45 Pakistan 2.95 45 Mozambique 2.98 46 Congo DR 2.95 46 Congo DR 2.06 46 Congo DR 2.33 Method of infrastructure assessment Regression analysis based on factors that are highly correlated with infra segments in the GCI ▶ We used 2017 infra scores that were published in the WEF’s annually-published GCI (but used 2016 data for North Korea) The GCI has infrastructure scores for individual nations that are computed via expert surveys Infrastructure scores for North Korea need to be estimated as no surveys have been conducted ▶ We identified factors strongly correlated with each segment’s score, using regression analysis to estimate the North’s scores Among the infrastructure segments, we focused on roads, railroads, ports, airports, and electricity generation We identified factors that are highly correlated (correlation coefficient over 0.3) with each segment’s score and conducted regression analysis (ie, length of paved roads/land area for roads; cargo freight and passenger volume/land area for railroads; container freight volume/total population for ports; air cargo volume/total population for aviation; and per-capita electricity consumption for electricity) We conducted regression analysis on 45 countries (excluding North Korea) where related data is available ▶ We calculated scores by infra segment and averaged them out to obtain a final score We calculated scores by infra segment (using regression analysis) and averaged them out to obtain a final score We calculated scores for 45 countries using the same method and compared these score with North Korea’s North Korea ranked 41st among 46 countries, with only five nations lagging the hermit kingdom (Brazil, Bangladesh, Argentina, Mozambique, and the Democratic Republic of Congo) 64 Overall score for North Korea’s infrastructure North Korea’s infrastructure in disrepair ▶ The nation’s railroads received a relatively high score as the regime has focused on (and heavily depends on) this type of transport (it is a favored way to traverse mountainous regions) The overall condition of the nation’s railroads is estimated to be low given the age of equipment and likely lack of maintenance No survey data is available, preventing a more detailed comparison with other countries Infrastructure rank and score (2017) Country Rank Distance from best 1 South Korea 5 Countries ranking similar to North Korea Comparison with Vietnam Score 2 3 4 5 6 Rank 7 Road 7 5.75 6 5 Electricity China 16 4.76 Vietnam 4 3 Vietnam North Korea 39 41 North Korea 3.62 3.50 Air Score 36 Ukraine 3.66 37 Algeria 3.65 38 Pakistan 3.64 39 Vietnam 3.62 40 Romania 3.60 41 North Korea 3.50 42 Brazil 3.34 43 Bangladesh 3.32 44 Argentina 3.26 45 Mozambique 2.98 46 Congo DR 2.33 Rail 2 1 Country Port Note: Score for South Korea, China, and Vietnam from average of quality of road, railroad, port, air transport, and electricity supply score of WEF’s competitive index; Score for North Korea derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities Source: WEF, World bank, CIA World Factbook, Samsung Securities Note: Based on average of quality of road, railroad, port, air transport, electricity supply score of WEF’s competitive index and North Korea’s score derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities 65 Road infrastructure in North Korea Roads are secondary to railways and are mainly used to make short trips ▶ Most roads (except highways) are unpaved, and even the highways are not in good condition due to a lack of maintenance ▶ There are a lot of tunnels and bridges in mountainous North Korea, but they are mostly dilapidated and thus pose a serious safety risk ▶ The total length of highways in the country has stagnated since 2000 due to an absence of investments Road infrastructure rank and score (2017) Country South Korea Paved road length /area 0.952 Rank Score Distance from best 1 5 2 3 4 5 6 5.56 7 Rank (km) (km) 26,500 800 0.431 18 4.58 3.36 37 Argentina 3.28 700 38 Brazil 3.12 650 39 Bangladesh 3.07 40 Latvia 3.05 41 North Korea 3.03 450 42 Russia 2.90 23,000 400 43 Romania 2.70 22,500 350 22,000 300 44 Mozambique 2.47 45 Ukraine 2.44 46 Congo DR 2.06 26,000 Highway length (RHS) 25,000 24,000 North Korea 0.478 0.006 35 41 3.37 3.03 Note: Score for South Korea, China, and Vietnam from average of quality of road score of WEF’s competitive index; Score for North Korea derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities Score Bulgaria 750 600 24,500 Vietnam Country 36 25,500 China Countries ranking similar to North Korea North Korea: Road and highway length Road length (LHS) 550 500 23,500 1990 1995 2000 2005 2010 2015 Source: Statistics Korea, Samsung Securities Note: Based on average of quality of road score of WEF’s competitive index and North Korea’s score derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities 66 Railroad infrastructure in North Korea North Korea beats South Korea in terms of total length of rail track, but its railroad infrastructure is in disrepair ▶ More than 70% of its railways were built when Japan occupied the peninsula, and most rail tracks are in disrepair due to an absence of maintenance (which stems from economic woes) The total length of railways spanning the nation has been declining since 2015 ▶ Railways account for 90% of cargo transportation and 62% of passenger transportation in North Korea Railroad infrastructure rank and score (2017) Country Freight, Rank Score passenger South Korea Distance from best 1 traffic/area 2 3 4 5 Countries ranking similar to North Korea North Korea: Railroad length 6 7 (km) Rank 5,350 3 5.66 Russia 4.55 13 Lithuania 4.39 14 Latvia 4.24 15 Indonesia 4.23 5,150 16 Portugal 4.22 5,100 17 North Korea 4.13 5,050 18 Estonia 4.11 5,000 19 Italy 4.08 4,950 20 Ukraine 3.94 21 Morocco 3.90 22 Georgia 3.84 5,250 5,200 China Vietnam North Korea 0.332 0.027 0.104 10 34 17 4.80 2.96 4.13 Note: Score for South Korea, China, and Vietnam from average of quality of railroad score of WEF’s competitive index; Score for North Korea derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities Score 12 5,300 0.335 Country 4,900 1990 1995 2000 2005 Source: Statistics Korea, Samsung Securities 2010 2015 Note: Based on average of quality of railroad score of WEF’s competitive index and North Korea’s score derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities 67 Port infrastructure in North Korea Its port facilities and vessels are getting old and worn, making trade difficult ▶ A split coastline (the sea borders its eastern and western flanks) make it difficult to develop maritime transportation ▶ The protracted economic sanctions against North Korea has hindered development of maritime transportation ▶ Its port infrastructure score ranking is the lowest among the major infra segments Port infrastructure rank and score (2017) Country Containe r traffic Rank Score 1 /population South Korea 521,271 10 2 3 North Korea: Port loading and landing capacity Countries ranking similar to North Korea Distance from best ('000 ton) Rank 4 44,000 36 Argentina 3.72 42,000 37 Vietnam 3.67 38 Bangladesh 3.62 39 Mozambique 3.57 38,000 40 Romania 3.53 36,000 41 Ukraine 3.48 42 Algeria 3.44 43 Tunisia 3.34 44 Brazil 3.15 45 North Korea 3.10 46 Congo DR 2.70 5 6 5.25 7 Country Score 40,000 China Vietnam 142,850 90,794 23 37 4.56 3.67 34,000 North Korea 5,181 45 3.10 Note: Score for South Korea, China, and Vietnam from average of quality of port score of WEF’s competitive index; Score for North Korea derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities 32,000 30,000 1990 1995 2000 2005 Source: Statistics Korea, Samsung Securities 2010 2015 Note: Based on average of quality of port score of WEF’s competitive index and North Korea’s score derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities 68 Aviation infrastructure in North Korea The North’s airports are in serious disrepair, though modernization efforts are reportedly underway ▶ Its airports and aircraft are severely dilapidated, and thus only a few aircraft are able to operate on Europe routes ▶ Kim Jong-un is seeking to modernize the Pyeongyang airport and revive regional airports (eg, Wonsan airport) ▶ UN sanctions have caused its air cargo volume to plunge (since 2013) Air transport infrastructure rank and score (2017) North Korea: Air cargo traffic Country Air cargo traffic /population South Korea China Vietnam North Korea 227.00 15.25 4.91 0.01 Rank Score Distance from best 1 4 20 40 43 2 3 4 5 6 5.88 4.90 7 (mil ton*km) Note: Score for South Korea, China, and Vietnam from average of quality of air transport score of WEF’s competitive index; Score for North Korea derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities Rank Country Score 4.5 36 Pakistan 3.98 4.0 37 Ukraine 3.96 3.5 38 Brazil 3.93 3.0 39 Tunisia 3.90 2.5 40 Vietnam 3.75 2.0 41 Iran 3.73 1.5 42 Algeria 3.69 1.0 43 North Korea 3.51 0.5 44 Mozambique 3.45 45 Bangladesh 3.34 46 Congo DR 2.95 3.75 3.51 Countries ranking similar to North Korea 0.0 1977 1982 1987 1992 1997 2002 2007 2012 2017 Source: World Bank, Samsung Securities Note: Based on average of quality of air transport score of WEF’s competitive index and North Korea’s score derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities 69 Power infrastructure in North Korea A lack of maintenance and the use of dilapidated equipment has caused utilization rates at power plants to decline ▶ The nation’s power mix consists mainly of hydropower and coal-fired power ▶ A majority of power generators are either turned off or are not run at full capacity due to faulty equipment and worn facilities ▶ Energy shortages worsened over 1990s~2000s in the wake of the North Korean famine Electric power infrastructure rank and score (2017) Country Electricity Rank Score consum ptio 1 per capita North Korea: Electric power consumption per Distance capita from best 2 3 4 5 6 (kWh per capita) 7 10,497 China 3,927 6 29 North Korea 1,411 600 38 41 4.34 3.74 Note: Score for South Korea, China, and Vietnam from average of quality of electricity supply score of WEF’s competitive index; Score for North Korea derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities Score 4.43 37 Turkey 4.40 1,200 38 Vietnam 4.34 1,000 39 Algeria 4.20 40 South Africa 3.92 41 North Korea 3.74 42 Bangladesh 3.65 400 43 Argentina 3.01 200 44 Mozambique 2.97 45 Pakistan 2.95 46 Congo DR 2.06 800 Vietnam Country Indonesia 6.41 4.98 Rank 36 1,400 South Korea Countries ranking similar to North Korea 600 0 1971 1977 1983 1989 1995 2001 2007 2013 Source: World Bank, Samsung Securities Note: Based on average of quality of electricity supply score of WEF’s competitive index and North Korea’s score derived by linear regression Source: WEF, World bank, CIA World Factbook, Samsung Securities 70 III. North Korea’s economic reconstruction and related opportunities III-1. Kim Jong-un’s first 5-year economic development strategy III-2. Assessment of North Korea’s infrastructure III-3. North Korea’s economic reconstruction projects III-4. Economic development zones and specially designated zones first to open III-5. Wonsan-center of attention Economic reconstruction projects Summary ▶ Promising sectors in first phase: Inter-Korean economic cooperation will likely follow three phases, with each one focused on boosting different industries. The first phase will be to establish an economic foundation and build trust. During this phase, infra investments will be most essential, and humanitarian aid should quickly follow. North Korea will likely open only some regions and industries. Promising sectors include construction, construction materials, energy, power generation, transportation, telecom networks, machinery, steel/raw materials, consumer goods, and pharmas. In the financial sector, the South’s policy banks should lend a hand. ▶ Promising sectors in second phase: During the second phase, distrust between the South and North should be dismantled and the North should open up additional areas. South and North Korea will likely jointly develop resources (with focus given to adding value). In this phase, more regions and industries should be opened, benefiting companies with links to resource development, tourism, and logistics. Financial support should expand to the private sector. ▶ Promising sectors in third phase: The third phase should see acceleration of investment and cooperation. North Korea could serve as a manufacturing base for export industries (as Eastern Europe did in the past)—eg, IT/auto assembly lines and logistics centers. IT and bio R&D centers could be established and North Korea’s financial market (including capital market) could be opened. ▶ Business opportunities to be found in infrastructure maintenance and tourism in initial phase: During the first 5-10 years, SOC investments should be greatest. Specifically, there should be: 1) maintenance work on and the construction of roads, railroads, ports, power generating facilities, and telecom networks; and 2) the establishment of industrial complexes and tourist districts. ▶ Projects to progress at rapid pace: In the initial phase, investment in North Korea will likely be led by South and North Korea’s public finances and international public finances. Past research materials (based on the assumption of unification by absorption) tended to estimate that it would take a long time to begin development projects in the North given the Korean government’s fiscal burden. However, we now believe that development projects will break ground earlier than these papers predicted since North Korea should be able to raise foreign capital via opening, though this will depend on the regime’s attitude towards investments from overseas (the North’s stance towards outside investment will likely determine the pace of injections of private capital). 72 Promising sectors during each phase Establish economic foundation and build trust Infrastructure Railroads, roads, ports, telecom networks Open only some regions and industries Selective special tourist zone Selective special economic zone Restart Gaesong industrial complex Humanitarian aid Staples, food, and drugs Construction, construction materials, energy, power generation, transportation, telecom networks, machinery, steel/raw materials, consumer goods, and pharmas & support from policy banks Distrust dismantled and greater opening Resource development Add value to products Opening expand Develop special economic zones Cooperate with South Korea Develop special tourist zones Acceleration of investment and cooperation Manufacturing base for export industries IT and auto assembly lines Logistics centers High-tech industries and financial market open IT and bio R&D centers Financial/capital market Construction, construction materials, energy, power plants, transportation, telecom networks, machinery, steel/raw materials, consumer goods, and pharmas + resource development, tourism → financial support should start coming from the private sector Ltd partnership companies South-North partnerships North-global partnerships Overall industries 73 Key early-stage infrastructure (years 5-10) SOC investments (page 77-81) ▶ Roads Start with projects that have superior business value (eg, Gaesong-Pyeongyang, Munsan-Gaesong, Sokcho-Goseong) ▶ Railroads Prioritize the renovation of major sections (eg, the Gyeongwon Line, the Gyeongui Line, the Donghae Line) ▶ Ports Start with major ports (eg, Nampo, Najin, Cheongjin, Wonsan, Hamheung) ▶ Power plants ▶ Industrial complexes ▶ Special tourist zones ▶ Telecommunication networks 74 (Ancillary information) How to finance North Korea’s economic reconstruction projects, by sector During the initial phase, investments in the DPRK will likely be led by South and North Korean governments’ public finances and by international public finances ▶ North Korea’s attitude towards opening up (and overseas investments in the country) will likely prove key considerations ▶ Initial-phase projects are set to be funded by the two Koreas’ public finances and international public finances ▶ Later phases can be funded by syndicate loans from international financial organizations and by domestic and overseas private capital Item Content Financing Roads Railroads ODA*, International financial agency, private fund Ports Infrastructure Aviation Power plants Transmission networks Industrial complex Environment Housing ODA, private fund Private fund, PPP Oil refineries Private fund Telecommunication networks Private fund Special economic zones ODA, private fund Reforestation ODA Agricultural infrastructure ODA, International financial agency House renovations ODA Residence in special economic zones ODA, private fund Special tourist zone Private fund Note: * e.g. South Korea, North Korea, China, Japan 75 Infra construction + maintenance: road-related projects Period (years, est.)* Financing Korea (South/North) 1~5 1~10 11~30 Public funds Private-public cooperation Overseas Private funds ODA International financial Institution Privatepublic cooperation Private funds Cost* (KRWb, est.) Note Expressway (North area) Gaesong-Pyeongyang (162km) ○ △ △ 109 Sinanju-Sinuiju (108km) ○ △ ○ △ 2,363 Build Gaesong-Haeju (80km) ○ △ ○ △ 1,400 Build Nampo-Pyeongyang (45km) ○ △ ○ △ 30 Pyeongyang inner-circle (46km) ○ △ ○ △ 805 ○ Pavement, repair Pavement, repair Build Pyeongyang-Sinanju (120km) ○ △ △ △ △ 1,132 Renovation Pyeongyang-Wonsan (172km) ○ △ △ △ △ 1,415 Renovation Wonsan-Mt.Geumgang (114km) ○ △ △ △ △ 1,075 Renovation Wonsan-Najin (734km) ○ △ △ △ △ 12,845 Build Expressway (South-North-etc) Munsan-Gaesong (11km) ○ Sokcho-Goseong (18km) ○ ○ △ △ 7 Repair ○ △ △ 315 Build Gaesong-Incheon (40km) ○ △ ○ △ 886 Build Naseon-Hunchun (50km) ○ ○ △ △ 875 Build Kimpo-Haeju-jungju (289km) ○ △ △ △ △ 5,058 Build Jeongok-Wonsan-Najin (734km) ○ △ △ △ △ 12,845 Build Cheongjin-Tumen (142km) ○ △ △ △ △ 2,485 Build National highway Gaesong-Sinuiju (194㎞) ○ ○ △ △ 130 Repair Pyeonggang-Chosan (556㎞) ○ ○ △ △ 373 Repair Pyeonggang-Kimhyongjik (542㎞) ○ ○ △ △ 363 Repair Goseong-Onseong (765㎞) ○ ○ △ △ 513 Repair Changdo-Gosan (141㎞) ○ ○ △ △ 94 Repair Kumho-Goseong (119㎞) ○ ○ △ △ 80 Repair Cost * (KRWb, est.) 431 7,912 36,855 Note: * Past research materials (based on the assumption of unification by absorption) estimated that it would take long to launch North Korea development projects given Korean government’s fiscal burden. We however believe development projects could come earlier than expected since North Korea could raise foreign capital after opening ** Cost estimates are based on KRIHS data (2013), which we believe are adjusted for North Korea in the same way as other institutions (eg, labor costs and land purchase costs) Source: Korea Research Institute for Human Settlements, Samsung Securities 76 (Ancillary information) Major road networks in North Korea Section Distance (km) Paved distance (km) 44 44 Distance (km) Paved distance (km) 106 - Pyeongyang-Gaesong 171 - Pyeongyang-Nampo 53 - Pyeongyang-Hyangsan 146 - Pyeongyang-Wonsan 209 - Pyeongyang~Sinuiju 228.8 82.7 Pyeongyang-Gaesong 193.6 193.6 Pyeongyang-Manpo 361.5 156.2 Pyeongyang-Wonsan 231.1 43.9 660 197.7 Sariwon-Haeju 75 75 Bukcheong-Haesan 212.2 10.4 Wonsan-Gimhwa 156 6 Pyeongyang-Nampo 54.8 49.3 Wonsan-Goseong 116.7 106.6 Yonggang-Oncheon 26.2 26.2 Haeju-Pyeongsan 85.2 0.9 Sinanju-Gaecheon 31.5 4.9 Jaeryung-Jedo Pyeongyang-Nampo Expressway National highway 1st class National highway 2nd class Section Wonsan-Najin Wonsan-Mt.Geumgang 48.2 0.1 Nampo-Sinanju 134.8 44.5 Geumcheon-Majeon 154.8 - Huicheon-Pyeongsan 344.7 28.2 Singye-Gimhwa 117.4 - Suncheon-Keumya 198.1 1.5 Pyeongya-Singye 109.4 18.9 Changsung-Hyangsan 114.9 1 Haeju-Yongdampo 6.4 6.4 Bakcheon-Chosan 220.7 0.6 Hwangju-Songlim 16.2 15.8 39.2 24.1 Haeju-Gaesong 91.1 7.6 Uiju-Gaecheon 165.2 0.3 Gansambong-Mt.Baekdu 35.2 - Ganggye-Huchang 125.4 0.1 Cheongkin-Hoiryung 84.7 - Juncheon-Hamheung 188.4 2.2 Seonggan-Deokhyun 350.6 - 61 8.3 Galhwa-Yanggu 91.2 - 100.6 0.9 Sinuiju-Najin 1,215.70 49.8 5 5 Pyeongyang-Jeungsan Haeju-Jangyeon Jeongju-Sakju Anak-Taetan 63.2 18.7 Jaeryung-Mongeumpo 93.2 17 Mangyeongdae Source: Ministry of Unification 77 Infra construction + maintenance: railroad projects Period (years, est.)* Financing Korea (South/North) 1~10 Railway Gyeongui-Line (412㎞) Gyeongwon-Line (103㎞) Donghae-Line (120km) Seoul-Sintanri (88.8㎞) Sintanri-Pyungang (31km) Pyeongang-Wonsan (103km) Wonsan-Naseon (631㎞) Pyeongyang-Nampo (15㎞) Pyungsan-Sepo (141㎞) Hyesan-Samjiyeon (100㎞) Gaesong-Haeju (100km) Anbyeon-Mt.Geumgang (102km) Gaesong-Pyungsan-Pyeongyang (350km) ○ ○ ○ Gangneung-Jejin-Goseong-Wonsan (220km) Express railway Seoul-Munsan (46㎞) Munsan-MDL (12㎞) MDL-Bongdong (8㎞) Bongdong-Gaesong (8㎞) Gaesong-Pyeongyang (187㎞) Pyeongyang-Sinuiju (225㎞) International railway Najin-Hongui (38.4㎞) Hongui-Namyang (116.6㎞) Transshipment facilities (border area) Najin-Hunchun Cost* (KRWb, est.) 5~30 Private-public cooperation ODA Cost* (KRWb, Note est.) 1,047 1,984 1,963 215 75 250 2,524 60 564 340 400 400 281 Double electrification Double electrification Double electrification Renovation Renovation Renovation Renovation Renovation Renovation Renovation Renovation Renovation Repair South-North linking 2,979 & renovation ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ △ ○ ○ △ △ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ △ △ △ △ △ △ △ △ △ △ △ △ △ △ 757 198 132 132 3,078 3,704 ○ ○ ○ ○ △ △ △ △ △ △ △ △ △ △ △ △ 56 169 150 242 ○ ○ ○ ○ 5,901 Public funds Overseas International Privatefinancial public Institution cooperation ○ 15,798 Build Build Build Build Build Build Build Build Renovation Build Note: * Past research materials (based on the assumption of unification by absorption) estimated that it would take long to launch North Korea development projects given Korean government’s fiscal burden. We however believe development projects could come earlier than expected since North Korea could raise foreign capital after opening ** Cost estimates are based on KRIHS data (2013), which we believe are adjusted for North Korea in the same way as other institutions (eg, labor costs and land purchase costs) Source: Korea Research Institute for Human Settlements, Samsung Securities 78 (Ancillary information) Major railroads in North Korea Region The West Coast Crossing east and west The East Coast Line Section Length (km) Gyeongui-Line Gaesong-Sinuiju 411.3 Hwanghae Cheongnyeon-Line Sariwon-Haeju 100.3 Pyeongnam-Line Pyeongyang-Pyeongnam Pyeongdeok-Line Daedonggang-Deokcheon-Gujangcheongnyeon 192.3 Pyeongbuk-Line Jeongju-Cheongsu 120.7 Manpo-Line Suncheon-Manpo 303.4 Pyeongwon-Line Pyeongyang-Gowon 212.7 Cheongnyeon Icheon-Line Pyeongsan-Sepocheongnyeon 140.9 Hyesanmanpo Cheongnyeon-Line Hyesan-Manpo 250.2 Geumgangsan Cheongnyeon-Line Anbyeon-Mt.Geumgang 102.5 Pyeongna-Line Ganri-Najin 781.1 Gangwon-Line Gowon-Pyeonggang 14.1 Sinheung-Line Hamheung-Bujeon 91.5 Heocheon-Line Dancheon-Heunggun 80.3 Geumgol-Line Yeohaejin-Geumgol 63.4 Baekdusan Cheongnyeon-Line Gilju-Hyesan 141.6 Hambuk-Line Banjuk-Hoiryeong-Najin 326.9 Musan-Line Gomusan-Musan 89.6 57.9 Source: Ministry of Unification 79 Infra construction + maintenance: other-related projects Period (years, est.)* Financing Korea (South/North) Privatepublic cooperation Overseas Internationa PrivateODA l financial public Institution cooperation Cost* (KRWb, est.) 1~5 years Public funds ○ ○ △ △ 1,389 ○ ○ △ △ 608 4 special zones ○ ○ ○ △ △ 4,946 Communication facilities ○ ○ ○ △ △ 159 8 demonstration areas ○ ○ ○ △ △ 2,830 Communication facilities ○ ○ ○ △ △ 178 ○ ○ ○ △ △ 25,797 Note Harbor Starting from lodgment areas Nampo, Najin, Cheongjin, Wonsan, Hamheung Airport Lodgment area’s airport repair Special tourist zones KRW398.4b Industry complexes Electric facilities Cost* (KRWb, est.) KRW222b 35,907 Note: * Past research materials (based on the assumption of unification by absorption) estimated that it would take long to launch North Korea development projects given Korean government’s fiscal burden. We however believe development projects could come earlier than expected since North Korea could raise foreign capital after opening ** Cost estimates are based on KRIHS data (2013), which we believe are adjusted for North Korea in the same way as other institutions (eg, labor costs and land purchase costs) Source: Korea Research Institute for Human Settlements, Samsung Securities ○ denotes full/complete and △ denotes partial 80 (Ancillary information) Eight major ports in North Korea Harbor Name Cargo handling capacity (10,000 ton) Berthing capacity (10,000 ton) Depth of water (m) Length of dock (m) Major cargo International sea route Trade portion (%) 28.9 1,351 5 9~11 4,000 Coal, cement, general goods Shanghai, Daeryeon, Southeast Asia, Middle East, Africa, Europe Cheongjin 800 2 7 2,138 East harbor : General goods, grain West harbor : Coal, steel Vladivostok 24.2 Hongnam 400 1 11 1,634 Fertilizer, Magnesia clinker - 11.5 Najin 300 1.5 11 2,515 Coal, fertilizer, woods, general goods Sokcho, Pusan Seonbong 200 0.5 12 1,253 Oil, petrochemicals - Wonsan 170 1 7 3,166 Cement, Vladivostok, Shimonoseki 2.8 Haeju 240 1 10 1,348 Cement, ore - 9.8 Songlim 100 - 11 900 Iron ore, Coal - 2.9 Nampo 9.3 10.6 Source: Ministry of Unification 81 Initial goals: Establish growth foundation and provide humanitarian aid Establish growth foundation ▶ Invest in light industry production facilities ▶ Develop mining resources and improve processing facilities ▶ Restore forests and protect the environment ▶ Prevent air and water pollution ▶ Improve agricultural water and land management. Ssupport the greater use of agricultural machinery Provide humanitarian aid ▶ Food ▶ Drugs ▶ Items to improve basic standard of living 82 (Ancillary information) Major natural resources and reserves in North Korea Source: I-RENK, NKRI, USGS, BP Resource Reference Unit grade Reserves Relative to global reserves (%)* Gold Metal Tonnes 698 1.29 Silver Metal Tonnes 6,356 1.12 Iron ore Fe 63.5% Bil tonnes 2.47 1.45 Zinc Metal Thou tonnes 27,425 11.92 Copper Metal Thou tonnes 4,235 0.54 Manganese Metal Thou tonnes 2,989 0.44 Nickel Metal Tonnes 147,638 0.20 Magnesite Ore Bil tonnes 1.5 19.23 Limestone Ore Bil tonnes 4.4 n/a Lignite Mixed Bil tonnes 17.9 5.54 Hard coal Mixed Bil tonnes 4.1 0.50 Note: I-RENK, NKRI, USGS, BP, Samsung estimates 83 (Ancillary information) Rare earth reserves in North Korea North Korea has the second-largest rare earth reserves in the world (after China). Tapping these stockpiles is key ▶ Geological surveys and mining began in 1943. Most of the constructed mines in the North are located in Pyeonganbuk-do ▶ Rare earth reserves are estimated at 48m tonnes (based on 2009 data from the North Korean Ministry of External Economic Affairs and the JV and Investment Commission) or about 20m tonnes (based on Chosun Shinbo data in 2011), the world’s second largest reserves ▶ Production capacity of rare earths is less than 1,000 tonnes pa (based on the Convergence Research Center for Development of Mineral Resources and on a mine in Ryongpo in Pyeonganbuk-do) Major mine General mine Source: I-RENK, NKRI, press 84 (Ancillary information) Location of mines in North Korea ① Iron Gold Coal Copper Source: I-RENK 85 (Ancillary information) Location of mines in North Korea ② Zinc Uranium Graphite Magnesite Source: I-RENK 86 (Ancillary information) Location of mines in North Korea ③ Rare earth elements Apatite Tungsten Molybdenum Source: I-RENK 87 (Ancillary information) Health care system in North Korea The nation’s health care system is dividend into primary, secondary, and tertiary levels of care ▶ People receive care where they live Primary: Local clinics (one in each village) Secondary: People’s hospitals (a small one in each small city) Tertiary: Big hospitals and university hospitals (one per large city) ▶ Patients can only go to primary care clinics (they cannot go directly to secondary or tertiary hospitals) ▶ There are no private hospitals—all hospitals are state-run Public health care is free of charge, but medical personnel, facilities, and drugs are in short supply ▶ The public health care system is free of charge But the number of doctors, clinics, hospitals, and available drugs is in short supply. Medical services are only for the powerful and well-connected ▶ There is a scarcity of pharmacies (drugstores), typically only one per town Pharmacies have no prescription drugs and only stock OTC drugs, first aid kits (eg, disinfectants and ointments), and oriental herb medicines ▶ Medical equipment is in short supply. Only a few hospitals have CT and MRI scanners Local clinics only have X-ray machines and ultrasound devices Syringes, needles, bandages, and IVs are often re-used, a practice which can lead to the spread of contagious diseases 88 (Ancillary information) Consumption and living standards in North Korea The North Korean market economy has been expanding as the number of locally-manufactured products has increased. But there is a necessity of price hikes amid prolonged economic sanctions ▶ North Korea’s market-based economy has expanded and thus more items are traded (since 2010) ▶ The amount of North Korea-made necessities is increasing ▶ Price hikes for such necessities amid economic sanctions (since 2017) have resulted in economic weakening The price hikes are attributable to a fall in supply from merchants as they expect a decrease in imports from China Gap in standard of living widens ▶ Necessities, including clothing, food, and household goods, used to be distributed by the state prior to the crises that came about in the 1990s ▶ Post-crises, a market economy came into being, leading to North Koreans buying their own food and clothes ▶ Inequality gap widens in dietary terms As more food is distributed via the market, more North Koreans are able to consume rice, meat, and fruit A majority of people are still in poor health, but the number of meals they eat per day and meat consumption are both rising The gap between the rich (who can afford a house, car, cell phone, and clothes) and the poor (who still follow a socialist lifestyle) has expanded 89 Humanitarian aid to North Korea Public aid* Private aid Year Form Means 1995 150,000 tonnes of rice Direct 1996 Dehydrated milk, grain UN 1997 Corn, dehydrated milk, medicine UN 1998 Corn, flour UN 1999 115,000 tonnes of fertilizer Year Form Means 1995 8,000 sheets/blanket Via other country 2.4 1996 Flour, dehydrated milk, cooking oil Via other country 24 1997 Corn, potatoes, ramen Via other country, Red Cross 18.2 15.4 1998 Medicine, milk (wet/dehydrated) Red Cross 27.5 Direct assistance 33.9 1999 Corn, medicine, fertilizer Red Cross, independent 22.3 2000 300,000 tonnes of fertilizer Direct 97.8 2000 Tangerines, clothes, sugar Red Cross, independent 38.7 2001 Underwear, corn, fertilizer Direct, WFP, WHO 97.5 2001 Corn, sugar, dehydrated milk Red Cross, independent 78.2 2002 Fertilizer, malaria prevention measures Direct, WFP, WHO 114 2002 Clothes, medical devices Red Cross, independent 57.6 2003 Assistance to vulnerable social groups Direct, WFP, UNICEF 110 2003 Clothes, household products Red Cross, independent 76.6 2004 Medicine, fertilizer Direct, WFP, WHO 131 2004 Agricultural materials, medicine Red Cross, independent 156 2005 Emergency assistance for flooding Direct, WFP, UNICEF 136 2005 Flour, medicine Red Cross, independent 77.9 2006 Assistance for infants Direct, WFP, UNICEF 227 2006 Flour, repair flood damage Red Cross, independent 70.9 2007 Food, foot & mouth disease prevention Direct, WFP, WHO 198 2007 Medical supplies, tangerines Red Cross, independent 90.9 2008 Infant and medical assistance WHO, UNICEF, IVI 43.8 2008 Clothes, tree nursery supplies Red Cross, independent 72.5 2009 Medical training Direct, WFP, WHO 29.4 2009 Foods, green house materials Red Cross, independent 37.7 2010 Assistance for flood damage and flu With private 20.4 2010 Briquettes, malaria prevention Red Cross, independent 20 2011 Assistance for infants and medicine UNICEF 6.5 2011 Milk (dehydrated/soy), medicine Independent route 13.1 2012 Medical and vaccine training IVI 2.3 2012 Flour, repair flood damage Independent route 11.8 2013 Sanitation and nutrition assistance WHO, UNICEF 13.3 2013 Bread ingredients Independent route 5.1 2014 Sanitation and nutrition assistance WHO, WFP 14.1 2014 Meals, agricultural materials Red Cross, independent 5.4 2015 Sanitation and medical assistance UNICEF, WFP 14 2015 Medical supplies, saplings Red Cross, independent 11.4 2016 Medical devices With private 0.1 2016 Bread ingredients, dehydrated milk Independent route Total Value (KRWb) 185 1,557 Total Value (KRWb) 0.2 1.2 0.2 893 Note: * Excluding food loans 90 (Ancillary information) Status of South-North Korea rail connection projects Railroad Gyeongui Line Donghae Line Area Line Status Value (KRWb) Constructor S. Korea Munsan-MDL (12.0㎞) Connected (Sep 2000-Dec 2012) 83.8 Hyundai E&C, Samsung C&T, Daewoo E&C, Handong Construction, Seyang Construction, Goosan Construction N. Korea MDL-Gaesong (15.3㎞) Connected (Sep 2000-Oct 2004) Gangneung-Jejin (110.2㎞) Not connected (Gangneung-Jejin) Jejin-MCL (6.6㎞) Connected (Jejin-MDL) (Sep 2002-May 2012) 106.3 Hyundai E&C, Samsung C&T, Daewoo E&C, Hyundai Asan MDL-Mt.Geumgang (18.5㎞) Complete Sintanri-Baengmagoji (5.6㎞) Connected (Sintanri-Baengmagoji) (Dec 2007-Nov 2011) 47.7 Baengmagoji-MDL (11.7㎞) Not connected (9.3km for Baengmagoji-Woljeongri) 129.1 Woljeongri-MDL Not connected (2.4km for Woljeongri-MDL) 21.7 N. Korea MDL-Pyeonggang (14.8㎞) Not connected S. Korea Cheorwon-MDL (32.5㎞) Not connected N. Korea MDL-Naegeumgang (84.1㎞) Not connected S. Korea N. Korea Gyeongwon Line Geumgang Line S. Korea Hyundai E&C, Samsung C&T, Daewoo E&C, Posco E&C, Daelim Industrial, Hyundai Asan Source: Korea rail network, parliamentary inspection materials, press release, Samsung securities 91 (Ancillary information) Hyundai E&C: List of inter-Korean projects Division Civil engineering Building Project Value (KRWb) Construction period Gaesong industrial complex wastewater treatment facility 13.1 2005-2007 Mt. Kumgang passenger ship pier facilities 94.0 1998-2000 Mt. Kumgang meeting facilities 51.7 2005-2008 Gaesong Industrial Complex vocational training center 10.6 2006-2007 Inter-Korean economic cooperation consultation office accommodation facilities 3.2 2006-2007 Inter-Korean economic cooperation office building 7.5 2006-2007 Mt. Kumgang tourism district fire station 1.5 2007-2008 25.4 1999-2000 3.2 2000-2001 Ryugyong Chung Ju-yung Gymnasium 50.3 2000-2003 Ryugyong Chung Ju-yung Gymnasium 4.6 2000-2001 151.7 1999-2002 Appurtenant works for KEDO nuclear power plant 60.3 1999-2002 Roads, spillways, and residences for KEDO nuclear power plant 43.9 1999-2002 113.5 1999-2002 69.6 1997-1999 Gaesong Industrial Complex power supply 0.7 2006-2007 Gaesong Industrial Complex substation landscape 0.1 2006-2007 2.2 1999-2000 Civil engineering and construction for 154KV Gaesong substation 1.6 2006-2007 154KV Gaesong sub-station 0.9 2006-2007 Mt. Kumgang convenience facilities (spa) Mt. Kumgang convenience facilities Main facility at North Korea’s light-water reactor site Plant Infrastructure for KEDO nuclear power plant Light-water reactor Electricity (energy) Roof reproduction facility and equipment supply Total 709.6 Source: Hyundai E&C 92 (Ancillary information) South Korea firms with involvement in construction projects in the North Company Note • Pyongyang Jung Ju-Young gymnasium construction Hyundai E&C • Cooperated with Hyundai Asan in infrastructure construction at Mt Kumgang and Gaesong Industrial Complex • Reviewed Gaesung-Pyongyang expressway, Gaesung-Shinuiju railway renovation, infrastructure development projects, etc Daewoo E&C • Reviewed feasibility of constructing a power plant in the North • Considered receiving sand as construction payment in lieu of cash • Planned to construct steel frame factory in Gaesong Industrial Complex in JV with “516 Construction Enterprises”, the only Nam Kwang E&C • local construction company in Gaesong • Reviewed overseas expansion with workers from the North Kumho E&C • Built a comprehensive support center in Gaesung Industrial Complex and considered long-term expansion of business in the North Kyeongnam Enterprises • Reviewed expressway construction project linking Yeongjongdo-Ganghwado-Gaesung Source: CERIK (2010) 93 III. North Korea’s economic reconstruction and related opportunities III-1. Kim Jong Un’s first 5-year economic development strategy III-2. Assessment of North Korea’s infrastructure III-3. North Korea’s economic reconstruction projects III-4. Economic development zones and specially designated zones first to open III-5. Wonsan-center of attention Economic development zones and specially designated zones to open first Summary ▶ Comparison with other communist countries’ opening: We compared North Korea with large communist countries that have already opened up (ie, China, Vietnam, and Poland) in terms of politics, foreign relations, economics, and structure. North Korea has more advantages than China and Vietnam in political, international, and economic terms, while it is structurally disadvantaged (it is more closed). Therefore, we expect North Korea’s reform and opening to focus on a few regions and industries in the early days. ▶ Politically advantaged: First, the North Korean regime is more stable than that in China, Vietnam, and Poland (upon their opening), but prolonged economic sanctions have been increasing pressure on the regime. Second, while the presence of a dictator reduces the possibility of radical reforms, a leader’s determination and competence could accelerate change. Kim Jong-un’s determination to improve the economy via opening up seems strong. Third, the Communist Party’s capacity to rule guarantees stability for major projects. ▶ Internationally advantaged: Until last year, North Korea was considered unstable by the international community. This year, however, it has done an about-face. North Korea (led by Kim Jong-un) should remain favorable towards opening up, but ethnicity and unification issue is the Achilles’ Heel for the North due to the wide economic gap with the South. Reform and opening should remain threats to the regime, and North Korea will likely seek gradual reforms under the international community’s guarantee that its regime will remain unchanged. ▶ Economically advantaged: Despite continued international sanctions, North Korea’s macroeconomic conditions are more stable than during the early days of reform in China, Vietnam, and Poland. In addition, as the North Korean government has pursued a market economy for the last several years, the private portion of the economy is greater than that seen in the early days of reform in China, Vietnam, and Poland. And, North Korea has a favorable geographic location for international trade and rich mineral resources which will pump future economic development. ▶ Inter-Korean economic cooperation offers fewer risks and more opportunities: Inter-Korean economic cooperation offers fewer risks and more opportunities compared to the past. North Korea has seen economic activity increase amid the market economy rapidly expanding, while South Korea needs to secure new growth engines to address its low growth structure (amid the aging population) and unemployment problem. North Korea has five specially designated zones and 19 economic development zones, areas where we believe inter-Korean economic cooperation will begin. 95 Towards CVIP CVIP; Complete, Visible, Irreversible Prosperity During the initial stage, priority will likely be given to special economic zones (SEZ) ▶ Foreign powers will guarantee North Korea’s regime → South-North political unification is harder to achieve ▶ However, a low-level unification may be easier → economic unification might be an efficient model ▶ Priority will likely be given to special economic zones—this should be the beginning of a new model for ‘CVIP’ Advantages of SEZ-centered integration Advantages Content North Korea’s cheap labor market can be protected • Need to create an environment to utilize the high-quality low-paid labor force • North Korea has the lowest illiteracy rate in the world so it should be relatively easy to quickly improve the quality of labor • Need to maintain a stable regime through the gradual opening • Need to prevent disturbances in the labor market Maintain low prices in N. Korea, protect S. Korea’s basic industries • South Korean government will provide food and necessities cheaply to prevent soaring prices in the North • Protect South Korean farmers from an influx of cheap agricultural products from North Korea Efficient financial aid to North Korea • Focusing on North Korea’s special economic zones, South Korea’s investments will be concentrated • This will also lead to investment opportunities for South Korean companies Create economic synergies, remove conflict factors • South and North Korea can create industrial synergies by tapping each others’ strengthens • Prevent conflict by operating within the space allowed by the North Korean government Source: BOK (2007), Samsung Securities 96 (Ancillary information) Economic integration method and evaluation of East & West Germany Economic integration method of East and West Germany ▶ Market economy led by West Germany Both nations recognized private property, ensured free market prices, and guaranteed the free movement of labor, capital, goods, and services Medical systems, pension systems, and social security systems were integrated into the model used by West Germany ▶ Reducing the wage gap between the East and West West German companies paid East German workers more than they strictly deserved (ie, above their productivity levels) Companies agreed (at a labor council in 1991) to raise the wages of East Germans to the level of West Germans within 4∼5 years ▶ Currency integration Wages and pensions were exchanged on a 1 for 1 basis. Other assets and liabilities were exchanged on a 2 for 1 basis ▶ Property was returned to individuals and privatization was done by selling businesses for cash The government returned property that had been seized by East Germany. A single state agency privatized businesses by selling them for cash Evaluation ▶ Advantages ① Pressure on East Germans to migrate west eased ② prices stabilized ③ East Germans’ income levels rose ▶ Side effects ① Pace of economic growth slowed ② East Germany’s wage and unemployment rates climbed ③ the government faced a fiscal burden ④ production and expenditure in East Germany mismatched ⑤ selling of East German companies delayed Source: BOK (2007), Samsung Securities 97 Comparison with Vietnam and China North Korea, being relatively more closed, is likely to choose a few regions and industries in the early days of reform and opening ▶ North Korea has more advantages in political, international, and economic terms, while it is structurally disadvantaged Political International Economic Structural Regime is less threatened International relations Macroeconomic stability Levels of education Compared to China, Vietnam, and Poland, the regime is less threatened, but prolonged economic sanctions have ratcheted up the pressure International relations have been improving rapidly in 2018 Despite continued economic sanctions, North Korea’s macroeconomic conditions are more stable compared to those in China, Vietnam, and Poland in the early days of reform The middle school enrollment rate was near 96% in the late 1980s and the illiteracy rate now stands near 0% Leadership change? Unification issue A dictatorship makes radical reform unlikely, while a leader’s determination and competence could accelerate the pace of change Reform and opening remain a threat to the regime given the wide economic gap with South Korea Gradual reform is expected, with the regime remaining intact Geographic location and natural resources Favorable location for international trade Blessed with rich mineral resources Inequality gap widening Inequality is deepening as the economic foundations of small cities fall apart (while Pyeongyang continues to advance) Communist Party’s capacity to rule Private portion of economy Degree of centralization Relatively stable The private portion of the economy is high, similar to Vietnam and Poland There is a power-centric planning system. It is more rigid than that in China, Vietnam, and Poland Trade dependence and regime rigidity Its trade dependence on other socialist countries is low, but its prolonged stay as a socialist economy has made the North Korean regime rigid 98 Inter-Korean economic cooperation offers fewer risks and more opportunities North Korea’s economic structure is changing vs South Korea needs new growth drivers ▶ North—The market economy has been expanding at an accelerating pace since Kim Jong-un took the helm, driven in part by deepening economic woes (due to its focus on nuclear development) ▶ South—Its need to develop new growth engines has increased as it must address issues such as low structural growth (amid the aging population trend) and persistent unemployment North Korea South Korea Market economy expanding in North The North Korean government, enterprises, and people better understand the market economy (than in the past) Uncertainty surrounding North Korea’s understanding of the market economy is easing Economic crisis and weak domestic demand in North Private assets are being accumulated and domestic demand is stronger than in the past Inter-Korean cooperation targeting demand in North Korea is likely to happen Decentralization of North Korean economy Municipalities and enterprises have more decision-making powers and duties → Regional budgets, regional banks, and regional-level economic development zones The number of nations engaging in trade with North Korea looks set to increase Low structural growth in South North Korea’s repetitive military actions and nuclear threats make it difficult to build trust South-North exchanges have been suspended The South in eyeing the North as a new growth engine (to revive its flagging economy) 99 Special economic zones and economic development zones Onsong Island Tourist Development Zone?0 Mubong Special Zone for International Tourism Kyongwon Economic Development Zone Hyesan Economic Development Zone Rason Economic and Trade Zone Manpo Economic Development Zone Wiwon Industrial Development Zone Chongsu Tourist Development Zone o?Orang Agriculture Development Zone Amnok River Economic Development Zone Sinuiju International Economic Zone ._Chongjin Economic Development Zone Hwanggumphyong and Wihwk. - Islands Economic Zone . Pukchong Agriculture Development Zone Sukchon Agriculture Development Zone . Hungnam Industrial Development Zone . Chongnam Industrial Development Zone Hyondong Industrial Development Zone Unjong High-Technology Development Zone 0 Sinphyong Tourist Development Zone Jindo Export Processing Zone Waudo Export Processing Zone Songrim Export Processing Zone Wonsan-Mt. Kumgang International Tourist Zone Kangryong Internationa Green Model Zone Kaesong Industrial Complex Source: SIPRI SAMSUNG SECURITIES 100 Special economic zones and economic development zones Type Special economic zone Location Date of designation Function Naseon 470.0 Dec 1991 High technology, international distribution, trade, export, financial services Shinuiju 132.0 Sep 2002 Financial, trade, commerce, industrial, high technology, tourism 2010 Information, tourism, modern agriculture, light industry 100.0 Nov 2002 International tourist spot Hwangeumpyeong-Wihwado Mount Kumgang Gaeseong Economic development zone Area (km2) 28.2 66.0 Nov 2002 Industrial, trade, commerce, financial, tourism River Amnok 6.6 Nov 2013 Agriculture, tourism, trade Shinpyeong 8.1 Nov 2013 Resort, sport, entertainment Songrim 2.0 Nov 2013 Export, storage, cargo Manpo 3.0 Nov 2013 Agriculture, tourism, trade Wiwon 3.0 Nov 2013 Mining and wood, agricultural product manufacturing Hyeondong 2.0 Nov 2013 IT, light industry Heungnam 2.0 Nov 2013 Chemical products, building materials, machinery Bukcheong 3.0 Nov 2013 Fruit growing and manufacturing, livestock Cheongjin 5.4 Nov 2013 Metal manufacturing, machinery, building materials Eorang 4.0 Nov 2013 Agriculture, stockbreeding, agricultural R&D Onseong island 1.7 Nov 2013 Tourist spot for foreigners Hyesan 2.0 Nov 2013 Export, modern agriculture, tourism Wau island 1.5 Nov 2013 Manufacturing for export 19.0 Jul 2014 Industrial complex for IT Gangryeong Jul 2014 Green technology R&D, organic products, marine products manufacturing Cheongnam Jul 2014 Eunjeong Sukcheon Cheongsu Jul 2014 Jul 2014 Historic site, tourism Jindo Jul 2014 Export, trade, storage Gyeongwon Oct 2015 Mubong 37.7 84.0 Apr 2015 Mount Baekdu-related tourism (co-developed with Helong city, China) 101 (Ancillary information) Rason Economic and Trade Zone Summary ▶ Rason was designated as North Korea’s first economic trade zone in1991, but the project has yet to bear fruit given the lack of infrastructure and absence of international awareness of the project ▶ In 2010, as their relations improved, North Korea signed an agreement with China to co-develop and co-manage: 1) the Rason Economic Trade Zone; and 2) the Hwanggumphyong and Wihwa Islands Economic Zone ▶ North Korea has encouraged China and Russia to invest in the Rason Economic and Trade Zone, an area which it wants to develop as a Northeast Asian logistics and tourist hub Piers at Najin port were constructed by China and leased to Russia. More than 90% of foreign investors in the area are from China ▶ North-China relations deteriorated due to nuclear testing by the North. This action induced China to agree to sanctions against North Korea Development plan of Naseon economic trade zone Goals Development Details Co-develop and construct basic facilities, industrial complexes, distribution networks, and tourist spots with China and Russia Make the area an advanced manufacturing base, a hub for Northeast Asian international trade, and a regional tourist spot Allocation of industry Najin: Secure a warehouse, machinery, and advanced technology; secure clothing, food, and beverage processing facilities Seonbong: Build materials, textile, machinery plants; build factories for agricultural, and marine product processing Woongsang: Timber processing complex Gulpo: Modern highly-efficient agriculture demonstration area Materials Oil/chemicals: Normalize oil processing facilities (Seungri Chemicals) Metallurgical: Develop and process mining materials Construction materials: Build plants than can produce cement, glass, and ceramics Timber: Build various plants such as timber processing, paper, furniture, and plywood Machinery Autos/other machinery: Short-term plan–build autos/light industry machines (eg, trucks, metal products, bicycles in Seonbong) Long-term plan–build construction and agricultural machines Shipbuilding and repair: Upgrade Najin dockyard, renovate Changpyeong ship repair facilities Source: Co-development of North Korea and China, 2011, Minjok 21, July, p.43 102 (Ancillary information) Sinuiju International Economic Zone Summary ▶ Sinuiju has been designated as a Special Administrative Region, benchmarking Hong Kong Shinuiju has enjoyed independent legislative, executive, and judicial powers for over 50 years (the central government only takes care of foreign relations and national defense matters) ▶ The initiative lost steam in 2002 when its first governor (a Chinese businessman) was arrested by authorities for tax evasion ▶ Development was reignited in 2013, with a Hong Kong firm planning to invest USD100b ▶ North Korea reached an agreement in 2015 with China’s Liaoning regional government to co-develop Sinuiju International Economic Zone Construct a park and waste water treatment facility (excluding leisure facilities and a golf course, which were included in the original plans) Build Sinuiju canal and wireless telecom base stations (new additions) Construct 10 more bridges to prepare for greater trade with China Total investments: USD400b 103 (Ancillary information) Hwanggumphyong and Wihwa Islands Economic Zone Summary ▶ North Korea and China committed to jointly develop the Hwanggumphyong and Wihwa Islands Economic Zone when relations between the two countries improved in 2010 ▶ The districts were divided into zones: IT, processed industrials, commercial, culture and tourism, urban agriculture, and housing zones ▶ The project was subsequently suspended as Chang Sungtaek (who led North-China cooperation) was sacked Hwanggeumpyeong and Wihwa Islands Special Economic Zone development plan Topics Details Scale 16km2 including Wihwa Islands Industrial complex Information, tourism & culture, modern agriculture, light industry Allocation of industry 1 center and 4 complexes: commercial center and information, tourism & culture, modern agriculture, processing complex Port Construct a passenger and freight port to meet the cargo/passanger needs (between Hwanggeumpyeong and Siniju) → Waterway transport needs can be met by Dandong port in China Roads Construct a road network in Hwanggeumpyeong → Construct two roads connecting Dandong with new districts Electric power Supply obtained from Dandong; construct a distribution network Communication Construct an internet and wireless communication network Energy Increase water, gas, and heat supply capacity Support organization Three-step model: Inter-government cooperation system, Hwanggeumpyeong co-management system, development and management system Source: Co-development plan of North Korea-China Naseon economic trade zone and Hwanggeumpyeong economic zone (2011) 104 (Ancillary information) Mt. Kumgang International Tourist Zone Summary ▶ Establish plans to develop areas neighboring Mt. Kumgang (eg, Masikryong ski resort, and regional economic development zones) ▶ Construct transport infrastructure in Wonsan, which is an entry point to Mt. Kumgang (see next section for more details) ▶ Place accommodation facilities along Mt. Kumgang hiking trails Infrastructure construction and service plan for Mt. Kumgang International Tourist Zone Type Infra Project Details Airport Refurbish Wonsan Airport so that it can used for international travel and accommodate thousands of passengers per day Railroad Construct a high-speed tourist railroad connecting Wonsan and Mt. Kumgang; repair tracks, buildings, tunnels as well as electrical and communication facilities on the current Wonsan-Mt. Kumgang railroad Road Construct a highway connecting residential and tourist spots; build a scenic road connecting Wonsan and Masikryong ski resort Port Modernize Goseong port, Wonsan passenger terminal, and build an international port Electric power Construct solar and wind power plants Water and waste Develop water catchments near Shingye stream, Gyeongjeong-ri, Goseong-gun (in order to supply 4,000m3 of fresh water per day) Construct waste and sewage disposal facilities near Onjeong-ri, Goseong-gun (capable of treating 4,000m3 of sewage per day) Construct a solid waste disposal facility near the mountain at Goseong port (capable of treating 18,000 tonnes of waste every two years) Wonsan Construct a city road in the center of Wonsan Construct commerce, cultural, science & technology, accommodation, and service districts in Wonsan Construct swimming pools, an aquarium, a submarine theater, gyms, and culture & entertainment centers along the coastline Construct a beach (to hold 10,000 people), tourist facilities, parks, and an indoor swimming pool near Myeongsasimni, Galma peninsula Tongcheon Build tourist facilities such as beaches and put together sightseeing boat tours near Chongseokjeong Mt Kumgang Park: Build parks near Yangjima and Jopo district, Onjeongri Facilities: Build gyms, swimming pools, marine sport clubs, and water parks near Goseong port, Yulsugok, and Seokjo district Culture & entertainment: Build beaches, health care centers, and hot springs near Onjeongri and Mt. Kumgang Install cable cars on the Sujeongbong-Paribong, Myogilyang-Birobong course Commerce: Build markets, a casino, an international commercial street, a culture park, and restaurants Accommodation: Build large-scale accommodation (for up to 6,300 people in total), golf resorts, and a condominium near Oekumgang Service Source: KIEP 105 (Ancillary information) Gaesong Industrial Complex Summary ▶ Development began after the Jun 15, 2000 announcement. The final goal was to develop 66km2 of land In the first stage, 3.3 km2 was developed (and completed in Jul 2006). No further developments have taken place ▶ As of 2015, 125 companies were producing USD560m-worth products pa Operations at the complex were suspended in 2016 Number of firms and production at Gaesong Industrial Complex (USD 10k) Number of firms at Gaesong Industrial Complex, by sector Foods 2% Non-ferrous Paper/wood metals 1% 2% Chemicals 7% (Number of firms) 60,000 140 Number of firms (RHS) 120 50,000 100 40,000 Electronics 11% 80 30,000 60 20,000 10,000 20 Production (LHS) 0 Machinery /metal 19% 0 2005 Source: KIDMAC Textile 58% 40 2007 2009 2011 2013 2015 Source: KIDMAC 106 North Korean companies Number of companies, by industry Industry Manufacturing company number, by industry Number of companies Energy / plant 261 Mining Light industry 360 Manufacturing 2,258 Other 12 Total 2,891 Source: KIIET Heavy industry Micro classification Number of companies Foods, cigarettes 508 Textile, clothes 383 Shoes, bags 40 Furniture, paper, woods 167 Other 134 Chemical 363 Construction materials 207 Metal 47 Machinery 269 Transportation 53 IT 88 Total 2,258 Source: KIIET Production growth trends (Units: 10,000 kWh, 10,000 tonne) Year 1988 1990 1998 2002 2007 2008 2009 2010 2011 2012 2013 2014 Grain 521 402 389 413 400 431 411 - Source: KIIET Macro classification Electric power 279 277 170 190 237 255 235 230 209 215 221 216 Coal 4,070 3,315 1,860 2,190 2,410 2,506 2,550 2,500 2,550 2,580 2,660 2,709 Iron ore 1,030 843 289 408 513 532 496 509 523 519 548 547 Cement 978 613 315 532 612 642 613 628 645 645 660 668 Iron 504 336 95 104 123 128 126 128 123 122 121 122 Manufacturing company number, by region Region Number of companies Percentage (%) Pyeongyang 392 17.4 Pyeongannam-do 330 14.6 Hamgyeongnam-do 263 11.6 Hwanghaebuk-do 249 11.0 Pyeonganbuk-do 248 11.0 Hamgyeongbuk-do 207 9.2 Jagang-do 172 7.6 Hwanghaenam-do 166 7.4 Gangwon-do 122 5.4 Ryanggang-do Total 59 2.6 2,258 100 Source: KIIET 107 Inter-Korean economic cooperation (1) Gaeseong Industrial Complex (2000-2016; suspended) ▶ Gaeseong Industrial Complex has been closed since Feb 2016 amid heightened tension between South and North Korea ▶ The site: achieved 5% of its land-use target; 6% of the enterprise number target; and 15% of employee number target ▶ Inter-Korean trade through the complex amounted to USD2.7b in 2015, representing 99% of trade and commercial transactions between the North and South Tourism (1998-2008; suspended) ▶ A travel program to Mt. Kumgang began in Nov 1998 and stopped in Jul 2008 when a South Korean tourist was shot dead ▶ A travel program to Gaeseong started in Dec 2007 but was halted in Nov 2008 ▶ A travel program to Mt. Baekdu was supposed to begin in May 2008 (in accordance with an agreement signed in Nov 2007) but that did not happen Transportation (2000-2008; suspended) ▶ 2000: It was agreed at a summit in June to link the Gyeongui Line and the Donghae Line and well as roads ▶ 2003: The Gyeongui and Donghae Lines were connected at the military demarcation line; vehicles were temporarily allowed to use the Gyeongui road; some South Korean tourists travelled to Mt. Kumgang via the Donghae road ▶ 2007: Trains conducted test runs on the Gyeongui and Donghae Lines; at a summit held in October, it was agreed that the two Koreas would carry out joint repair work and joint inspections of the Gaeseong-Pyongyang highway ▶ 2008: Related projects were stopped after North Korea halted border crossings with the South on Dec 1 108 Inter-Korean economic cooperation (2) Najin-Hasan project (2006-2016; suspended) ▶ This project was aimed at repairing the Najin-Hasan railway (54km), modernizing Najin harbor, building a cargo terminal, and operating freight trains ▶ Three Korean firms (Posco, Hyundai Merchant Marine, and Korail) bought stakes in a JV involving North Korea and Russia with the aim of: Securing a coking coal transportation network between Russia and North Korea (Posco) Conducting marine transportation (Hyundai Merchant Marine) Operating a railway (Korail) ▶ Three pilot runs were conducted (Nov 2014, Apr 2015, and Dec 2015) after multiple onsite inspections ▶ The project was suspended in accordance with sanctions against the North (after nuclear and missile tests in 2016) Greater Tumen Initiative (1992 to present) ▶ This project is designed to promote intergovernmental economic cooperation in Northeast Asia (particularly the Tumen area) for the development of and investment in priority sectors (eg, transportation, energy, tourism, and the environment) ▶ It was launched in 1991 as the Tumen River Area Development Program covering Yanji (China), Cheongjin (North Korea), and Nakhodka (Russia) ▶ In 2005, it was renamed the Greater Tumen Initiative (GTI), and its geographic coverage was expanded to the east coast of South Korea, Naseon in North Korea, the autonomous region of Inner Mongolia (China), the eastern part of Mongolia, and Russia’s maritime territory and Khabarovsk ▶ North Korea withdrew from the Initiative in 2009 ▶ The GTI currently has four members (South Korea, China, Mongolia, and Russia) and one observer (Japan) 109 III. North Korea’s economic reconstruction and related opportunities III-1. Kim Jong Un’s first 5-year economic development strategy III-2. Assessment of North Korea’s infrastructure III-3. North Korea’s economic reconstruction projects III-4. Economic development zones and specially designated zones first to open III-5. Wonsan-center of attention Wonsan draws attention Summary ▶ Wonsan—Kim Jong-un’s hometown: Kim Jong-un visited the Wonsan Kalma Shore Tourist Zone at end-May (when the nuclear site at Punggye-ri was also destroyed). North Korea media reported that he ordered the construction of tourist facilities (in the tourist zone) to be completed by Apr 2019. Socialist leaders tend to see development of their hometown as a pet project (eg, Xi Jinping’s affection for Xian), and Kim Jong-un is known to favor his hometown (Wonsan). Kim Jong-un announced at the Central Committee meeting of the Workers’ Party in Mar 2013 plans to promote tourism in Wonsan and Mt. Kumgang. ▶ Special institutional and legal treatment: It is institutional and political uncertainty that makes international investors hesitant to invest in a socialist country. North Korea says that its Constitution (Article 37 of Chapter 2) ensures the security of foreign investment in the country, though we believe the article holds little substance. Interestingly, Wonsan is an exception. Kim Jong-un personally offered legal guarantees covering the Wonsan-Mt. Kumgang International Tourist Zone via a decree (No. 48) issued by the Presidium of the Supreme People’s Assembly on Jun 11, 2014, differentiating Wonsan from other specially designated areas. ▶ Development focus, by phase: The Wonsan-Mt. Kumgang International Tourist Zone has four development goals: 1) becoming naturefriendly; 2) offering a unique experience; 3) being competitive all year round; and 4) facilitating international exchanges (historical, economical, cultural). Wonsan will be developed in the first phase (2013-2017) and Mt. Kumgang in the second phase (2018-2025). ▶ Plans to build tourist infrastructure: The plans include: 1) privatizing a military airport in Kalma (to allow easier access to Mt. Kumgang) and developing Wonsan International Airport (building large airstrips to accommodate up to 12 aircraft and 4,000 tourists a day); 2) building a number of piers for passenger ships in Wonsan port to improve nautical accessibility; 3) constructing and improving roads and railways (expanding the Pyongyang-Wonsan highway and upgrading the Wonsan-Kosong road to an expressway); and 4) improving other infrastructure such as power generation, waste treatment, and waste water treatment facilities. ▶ Other advantages of Wonsan: Wonsan is also attractive as a port since it is close to Dancheon (which is rich in natural resources; see p135). This means that Wonsan could become a center of North Korea’s east coast development. In short, Wonsan should not only draw foreign tourists, capital, and goods but also be a place to generate hard currency (since capital is in short supply in North Korea)(explain). Accordingly, Wonsan will likely take center stage in North Korea’s economic opening. 111 Wonsan: Hometown of Kim Jong-un Kim Hyong-jik Kang Pan-sok Father of Kim Il-sung 1894-1926 Mother of Kim Il-sung 1892-1932 Kim Chul-ju Kim Yong-ju Younger brother 1916-1935 Younger brother 1920- Kim Man-il Kim Kyong-hui Younger brother 1944-1947 Younger sister 1946- Kim Il-sung 1912-1994 Kim Jong-il 1941-2011 Kim Jong-nam Kim Jong-chul Older half brother 1971-2017 Kim Jong-un Older brother 1981- 1984- * Spouses are sorted by date of marriage * Half siblings are omitted, except for Kim Jong-nam Jegal Kim Song-juk Wife No children 1923-1950 Wife 1 son Birth and death unknown Wife 1 son Birth and death unknown Hong Il-cheon Kim Young-suk Ko Yong-hui Kim Ok Wife 1 daughter 1942- Wife 2 daughters 1947- Wife 2 sons, 1 daughter 1953-2004 Wife 1 daughter 1964- Kim Jong-suk Kim Song-ae Hong Yong-suk Wife 2 sons, 1 daughter 1917-1949 Wife 2 sons, 2 daughters 1924-2014 Song Hye-rim Wife 1 son 1937-2002 Ri Sol-ju Wife 2 sons, 1 daughter 1989- Kim Yo-Jong Younger sister 1987- Kim Kim Ju-ae Kim Son 2007- Daughter 2013- Son 2017- 112 Wonsan development since 2013 Wonsan-Mt. Kumgang International Tourist Zone ▶ Kim Jong-un began to promote the Wonsan Tourist Zone in Mar 2013 “We need to set up a number of tourist sites across the country (including Wonsan and Mt. Chilbo) to promote tourism and encourage regional municipalities to develop economic development zones to enable them to meet their own needs” (Apr 2, 2013; reported by Rhodong Shinmun) Central government steps up development plans ▶ The Central Committee meeting of Workers’ Party met in Mar 2013 The committee came up with new plans to promote the Wonsan-Mt.Kumgang Tourist Zone ▶ The government approved the plans in Nov 2013 ▶ The Presidium of Supreme People’s Assembly issued a decree (No. 48) in Jun 11, 2014 He announced the designation of the Wonsan-Mt. Kumgang International Tourist Zone 113 Wonsan-Mt. Kumgang International Tourist Zone Development goals ▶ Foster Wonsan-Mt. Kumgang as a comprehensive area offering a variety of tourist resources in a sustainable manner ▶ Four development goals Be nature friendly Offer a unique experience Be competitive all year round Run international exchanges Development plans ▶ Separately develop Wonsan and Mt. Kumgang (see next page) ▶ Develop Wonsan in the first phase (2013-2017) Wonsan downtown, Masikryong ski resort, Ullim Falls, and Wonsan International Airport have been developed to enable the area to become a comprehensive all-season tourist destination Songdowon beach, Myongsasimni beach, and Kalma shore have been developed as summer resorts Masikryong ski resort has been developed with winter in mind ▶ Develop Mt. Kumgang in the second phase (2018-2025) Inner Kumgang, outer Kumgang, Samilpo, and Sea Kumgang, Thongchon (Tongjongho and Sijungho), Sogwang Temple Mt. Kumgang: Natural landscape Outer Kumgang: Hot springs, forested areas, and resorts in Sijungho Others: Mountain climbing, sea cruises, bathing, fishing, and golfing 114 Wonsan-Mt. Kumgang International Tourist Zone ?5 ?5 [1137? N) '4 Ln Will-1" [3237gag'~Imgg a )4 . 33' inseam: 5 ?1 .ga Source: Tongilnews, Gangwon province SAMSUNG SECURITIES 115 Plans to build tourist infrastructure in Wonsan Develop Wonsan International Airport ▶ Privatize military airport in Kalma to allow foreign tourists easy access to Mt. Kumgang ▶ Build large airstrips to accommodate up to 12 aircraft (at a time) ▶ Hike capacity so the airport can handle 4,000 tourists a day Expand Wonsan port and develop areas in the vicinity ▶ Build a number of piers for passenger ships to improve marine accessibility Construct and improve roads and railways ▶ Expand the Pyongyang-Wonsan highway (which spans 206km) ▶ Make the 108km-long Wonsan-Kosong road an expressway ▶ Others Expand the roads in downtown Wonsan Establish a ring road connecting: 1) Wonsan-Masikryong ski resort (25km); 2) Masikryong ski resort-Ullim Falls (22km); and 3) Wonsan-Sogwang temple (47km) Other infrastructure ▶ Build electrical substations to secure a stable power supply, and expand power-generating capacity at: 1) hydropower plants in Thongchon and Cheongnyeon; and 2) a power plant in Anbyon ▶ Construct a large solid waste treatment facility and modernize waste water treatment facilities 116 Institutional and legal support to spur investment in Wonsan North Korea’s constitution and special laws ▶ Article 37 of Chapter 2 in Constitution DPRK continues to encourage the joint management or the setting up of JVs between North Korean institutions/companies/organizations and foreign companies/individuals as well as the founding of companies in specially designated economic zones ▶ Decree (No. 48) issued by the Presidium of Supreme People’s Assembly on Jun 11, 2014 The decree offers legal grounds to develop Wonsan–Mt. Kumgang as a specially designated economic zone ▶ Other laws Efforts have been taken to legally ensure that foreign investors (whose rights and interests are infringed at the Wonsan-Mt. Kumgang International Tourist Zone) can seek legal recourse (via arbitration or lawsuits; or by filing complaints with international arbitration institutions) Difference between the law to designate Wonsan-Mt.Kumgang a special zone and other similar laws ▶ Other similar laws are legislated at the Supreme People’s Assembly ▶ Wonsan-Mt. Kumgang-related laws have been dictated by Kim Jong-un 117 Kim Jong-un’s affection for Wonsan (visited May 26, 2018) He ordered tourist facilities at the Wonsan Kalma Shore Tourist Zone to be completed by Apr 2019 Source: Yonhap News, KCNA 118 (Ancillary information) Wonsan Zone Development Corporation: Songdowon Hotel ▶ Location: Pongchun-dong, Wonsan ▶ Business overview: Upgrade the Songdowon Hotel into a five-star hotel by increasing its capacity from 407 to 1,000 ▶ Major facilities At present, the hotel (and grounds) covers 37,000㎡ and actual floor space is 12,137㎡. Consisting of two blocks (block 1 and 3 are 11 floors; block 2 is 7 floors), it is one of the major hotels in Wonsan. It has 207 rooms with a dining hall (capable of seating 1,300 people) and amusement facilities ▶ Benefits of location The hotel is built close to a sandy beach. Wonsan is central to Mt. Kumgang, Chongsokjong, Masikryong ski resort, and Myongsasimni ▶ Estimated cost: USD100m ▶ Period of implementation: 18-month construction; 20-year operation ▶ Profitability: IRR of 16.3% and NPV of USD20.6m (when using a discount rate of 13%) Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 119 (Ancillary information) Wonsan Zone Development Corporation: Haean Hotel ▶ Location: Pongchun-dong, Wonsan ▶ Business overview: Renovate the Haean Hotel (18 stories) into a four-star hotel that can sleep 500 persons ▶ Major facilities At present the hotel, located in Wonsan Square and facing the sea, covers an area of 3,200㎡. It is a 12-storey building with 200 rooms. Sleeping 300 persons, it also provides services such as a restaurant, a shop, recreation facilities, and a bathhouse ▶ Benefits of location Tourists can enjoy panoramic views of Wonsan City, Wonsan passenger terminal, and easily access tourist spots in the Kalma area ▶ Estimated cost: USD24m ▶ Period of implementation: 18-month construction; 20-year operation ▶ Profitability: IRR of 22.7% and NPV of USD15m (discount rate: 13%) Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 120 (Ancillary information) Wonsan Zone Development Corporation: International exhibition house ▶ Location: Jonjin-dong, Wonsan ▶ Business overview: Construct a building that can host international exhibitions, expositions, and conferences ▶ Major facilities A cylindrical structure with two floors underground and three floors above-ground in a building (and grounds) spanning 10,000m2 (total floor space of 15,000m2). The underground floors will be used as a bonded warehouse and a parking lot. The exhibition halls will be located on the first floor, and several conference halls, a multi-functional hall, and a restaurant will be on the second floor ▶ Estimated cost: USD10m ▶ Period of implementation: 16-month construction; 15-year operation ▶ Profitability: A preliminary feasibility study is underway Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 121 (Ancillary information) Wonsan Zone Development Corporation: Passenger ships ▶ Route: Wonsan–Kosong ▶ Business overview: Transport tourists by passenger ship from Wonsan to Kosong Port via Thongchon ▶ Benefits Passenger ships can utilize established infrastructure (Wonsan port and Kosong port) Wonsan, with a population exceeding 300,000, is to be developed into an international tourist village that will likely be visited by more than 1m tourists pa. As such, demand for Wonsan-Mt. Kumgang transport services has significant growth potential. During sightseeing trips, tourists can view local beauty spots ▶ Estimated cost: USD16m (for two passenger ships) ▶ Period of implementation: 12-month construction; 15-year operation ▶ Profitability: IRR 17.7%, NPV of USD7.5m (discount rate: 10%) Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 122 (Ancillary information) Wonsan Zone Development Corporation: Water park ▶ Location: Jung-dong, Wonsan ▶ Business overview: Designed to serve tourists visiting Wonsan-Mt. Kumgang International Tourist Zone all year round ▶ Size of water park The designated site should span 14,000㎡ and be able to accommodate 7,000 persons per day ▶ Estimated cost: USD49m ▶ Period of implementation: 18-month construction;15-year operation ▶ Profitability: A preliminary feasibility study is underway Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 123 (Ancillary information) Wonsan Zone Development Corporation: Department store ▶ Location: Haebang-dong No. 2, Wonsan ▶ Business overview: Build the largest department store in Wonsan and serve locals and domestic/international tourists ▶ Major facilities to be developed The store will be built in a U-shape on grounds covering 3,800㎡ (floor space to equal 3,100㎡) The façade of the building (which will have five floors and a basement) is expected to face the sea ▶ Estimated cost: USD7.4m ▶ Period of implementation: 18-month construction; 10-year operation ▶ Profitability: A preliminary feasibility study is underway Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 124 (Ancillary information) Wonsan Zone Development Corporation: Cultural facilities ▶ Location: Jung-dong, Wonsan ▶ Business overview: Improve cultural facilities to attract Wonsan citizens as well as domestic/international tourists ▶ Major facilities This project is to build cultural facilities on grounds spanning 15,000㎡, with floor space of 12,000㎡ (to include a cinema, sports center, and restaurants) ▶ Estimated cost: USD60m ▶ Period of implementation: 24-month construction; 15-year operation ▶ Profitability: A preliminary feasibility study is underway Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 125 (Ancillary information) Wonsan Zone Development Corporation: Food processing plant ▶ Location: Sokhyeon-dong, Wonsan ▶ Business overview: To add more production lines and capacity at Songdowon General Food Factory ▶ Current capacity At present, the factory grounds cover 31,500㎡ and its floor space equals 9,390㎡ The plant produces more than 50 kinds of processed food such as confectioneries, staples (eg, bread), soya milk, non-staples (pickles), and beverages (eg, alcohol and tea). Its production capacity comes in at around 8,000 tonnes pa ▶ Future capacity The factory should be expanded by 30,000㎡ and make more local specialties (made out of fruits and maritime products for foreign tourists) ▶ Estimated cost: USD1.3m ▶ Period of implementation: 18-month construction; 10-year operation ▶ Profitability: A preliminary feasibility study is underway Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 126 (Ancillary information) Wonsan Zone Development Corporation: Brewery ▶ Location: Kwangpoong-dong, Wonsan ▶ Business overview: Build a brewery (50,000 kL pa) by making use of water in the Beonp-dong area of Kangwon Province ▶ Benefits of location The water in the area is mineral rich. Wonsan’s railway and road networks are convenient to transport raw materials (eg, barley and rice). The proposed brewery, located inside the zone, should be eligible for preferential treatment (relating to investment and business activity) ▶ Estimated cost: USD52.5m ▶ Period of implementation: 20-month construction; 20-year operation ▶ Profitability: IRR 15.1%, NPV USD5.1m (discount rate: 13%) Source: investment guide for Wonsan-Mt. Kumgang International Tourist Zone (2015) 127 IV. Appendices IV-1 Moon Jae-in administration’s new economic roadmap initiative for Korean peninsula IV-2. Case studies—market opening in China, Vietnam, and Poland IV-3. Economic comparison of South and North Korea IV-4. North Korea’s financial system IV-5. Others New Economic Map Initiative for economic unification Summary ▶ Moon Jae-in’s five North Korea policies: 1) Establish peace on the Korean peninsula; 2) denuclearize the peninsula while keeping the North Korean regime stable; 3) build a permanent peace regime; 4) create a new economic map initiative; and 5) pursue non-political exchanges with the North. The economic map initiative is a significant step towards economic unification. ▶ New economic map of Korean Peninsula and economic unification: The new economic map is a grand plan to enhance interKorean relations and economic cooperation to create new growth engines for the South and widen the country’s economic territory towards Northeast Asia and Eurasia. The initiative has three economic belts: 1) an industry-logistics and distribution-transportation belt in the west; 2) an energy-resource belt on the east coast; and 3) an eco-tourist belt in the Demilitarized Zone (DMZ). ▶ West coast belt: An industry-logistics belt along the west coast, linking the Seoul metropolitan area, Gaeseong Industrial Complex, Pyeongyang/Nampo, and Sinuiju. It would be first in line for a host of benefits, and it is highly promising since it contains both capital cities. It would see the creation of transportation and logistics infrastructure linking Seoul to China’s Liaoning province. ▶ East coast belt: The aim is to co-develop Mt. Kumgang, Wonsan, Dancheon, Chungjin, and Naseon, and then link the east cost to Russia. It would include the development of major tourist districts along the east coast, laying natural gas pipelines from the Russian Far East, and developing mines (for natural resource extraction) in the North. This belt would require more investments from Seoul and neighboring countries than the other two belts. ▶ DMZ belt: A tourist belt linking Mt. Seorak, Mt. Kumgang, Wonsan, and Mt. Baekdu. The DMZ would be developed into an ecological and eco-friendly tourist belt. This belt would be focused more on peace and environmental conservation than on economic gains. Major projects would include a World Eco-Peace Park. Because of its political significance, this belt could be developed more quickly than the other belts. ▶ Funding: Financing would differ by project type. For instance, public projects would require the cooperation of the Korean government and international organizations. This, however, must be preceded by denuclearization. As for public-private partnerships, the government and the private sector would share funding based on profitability. The most important and notable projects will take the longest to become feasible due to funding issue. 129 Moon Jae-in’s North Korea policies Key points: Simultaneous use of sanctions and dialogue; Korea plays a leading role Five policies ▶ Establish peace on the Korean peninsula ▶ Denuclearize the peninsula while keeping the North Korean regime stable ▶ Build a permanent peace regime ▶ Create a new economic map on the Korean peninsula ▶ Pursue non-political exchanges with the North Four proposals after inauguration ▶ Arrange reunions of separated families (probable) ▶ Let North Korea participate in the PyeongChang Winter Olympics (realized) ▶ Suspend military actions along the borderline (realized) ▶ Call for the resumption of inter-Korean talks including a summit (realized) 130 New Economic Map Initiative for Korean peninsula and economic unification Concept ▶ A grand plan to enhance inter-Korean relations and economic cooperation to create new growth engines for the Korean economy and widen its economic territory towards Northeast Asia and Eurasia ▶ Process of achieving economic unification via settlement of peace and co-prosperity on the Korean peninsula and in Northeast Asia Background and meaning ▶ The South Korean economy urgently needs new growth drivers ▶ The map is aimed at broadening economic territory towards Eurasia ▶ A realistic approach is essential to solving the North’s nuclear issues and elicit changes in the North ▶ It is designed to explore new ways of promoting inter-Korean economic cooperation Vision, targets, and principles ▶ Vision: Economic unification of Korean peninsula and opening of Northern Economic Cooperation era ▶ Three targets: 1) add new growth drivers and create jobs for Korean economy; 2) pursue changes in North Korea and economic integration of two Koreas; and 3) lay the foundation for peaceful community between two Koreas ▶ Four principles: 1) separate politics from the economy and also separate private and public sectors; 2) embrace comprehensive reciprocity; 3) follow international rules; and 4) act on national consensus 131 New Economic Map Initiative—Three economic belts 1) industry-logistics and distribution-transportation belt on the west coast; 2) energy-resource belt on the east coast; 3) the eco-tourist belt in the Demilitarized Zone (DMZ) Co-development with North, China, Russia Manufacturing agricultural and marine products Renewable energy Natural resource development High tech device, machinery East coast economic belt Energy, tourism Environment and tourism related manufacturing ICT DMZ peace belt West coast economic belt Technology, distribution Ecology tour, afforestation project, co-manage water resources Energy Renewable energy, marine product, eco-friendly component Source: Advisory council on state affairs 132 New Economic Map Initiative: Summary Key takeaways ▶ Establish three economic belts to secure new growth drivers for the peninsula and promote cooperation with Northeast Asia and Eurasia Belts Sector Expected projects Construct west coast inter-Korean economic cooperation belt connecting Seoul, Gaeseong industrial complex, Pyongyang, Nampo, and Shinuiju West coast: industry/ distribution/ transportation belt Industry Expand development of Gaeseong industrial complex Develop industrial complex and special economic zones in Pyongyang, Nampo, and Shinuiju Transportation, distribution Connect and modernize Gyeongui Line railways and roads Connect Koreas and China through land transportation system Modernize harbors in Nampo and Haeju Electricity Construct new thermoelectric power plant and modernize electric grid Co-develop Mount Kumgang, Wonsan, Dancheong, Cheongjin and Naseon, connecting east coast with Russia East coast: energy/ resource belt Energy Construct gas line connecting Koreas and Russia Modernize hydroelectric power plants and construct thermoelectric power plants Natural resources Develop Dancheon special resource zone Transportation, distribution Connect and modernize Gyeongwon and Donghae Line railways and roads Industry Develop tourist region in Wonsan, Mount Kumgang, and Mount Chilbo Develop special economic zones and industrial complexes in Wonsan, Hamheung, Cheongjin, Najin and Seonbong Build tourist belt connecting Mount Seorak, Mount Kumgang, Wonsan, and Mount Baekdu, emphasizing environment and peace DMZ: environment/ tourist belt Environment Co-manage shared river Designate DMZ an eco-reserve Tourism World eco-peace park and center for cultural exchange Source: Ministry of Unification, Korea Institute for National Unification, Samsung Securities 133 New Economic Map Initiative: West coast belt Key takeaways ▶ Build an industry-logistics belt along the west coast linking the Seoul metropolitan area, Gaeseong Industrial Complex, Pyongyang/Nampo, and Shinuiju Characteristics ▶ To be prioritized for a host of benefits ▶ Highly promising since the belt contains the capital cities of both Koreas ▶ To be linked with China’s Liaoning province Major projects Pyongyang-Nampo project ▶ Develop special economic zones focused on manufacturing Expand Gaeseong Industrial Complex first before building new special economic zones in Pyongyang, Nampo, and Shinuiju ▶ Construct transportation and logistics infrastructure linking major industrial complexes, Seoul, Pyongyang, and Liaoning province Gaeseong-Haeju project Share and jointly manage the Gyeongui Line railways and roads* Modernize power generation facilities, and transmission/distribution networks ◉Haeju Source: NGII, Ministry of Unification *Agreed at second summit in 2007 134 New Economic Map Initiative: East coast belt Key takeaways ▶ Co-develop Mt. Kumgang, Wonsan, Dancheon, Cheongjin, and Naseon and then link the east coast to Russia Hasan Characteristics ▶ Less advantageous than the west coast belt in terms of industrial development and economic cooperation ◉ Cheongjin Naseon-Cheongjin-Hasan project Major projects ▶ Develop major tourist districts along the east coast (including Mt.Kumgang, Wonsan, and Mt. Chilbo) ▶ Energy and natural resources Massive, long-term projects, to which energy price volatility should be important To lay natural gas pipelines from the Russian Far East Hamheung-Bujeon plateau project ◉ Dancheon Bujeon Shinpo-Dancheon project ◉ Hamheung ▶ Develop mines for natural resource extraction (see page 30) Proclaim Dancheon (rich in magnesite, zinc, and lead) as a special zone ◉ Wonsan Seorak-Kumgang-Wonsan project ▶ Transportation and logistics infrastructure Connect and modernize the Gyeongwon Line and Donghae Line railways and roads. Expand transportation networks with China and Russia with Najin and Seonbong as hubs. Modernize key harbors at Wonsan, Hamheung, and Cheongjin. Build power generation facilities for major industrial complexes Kumgang Seorak Source: NGII, Ministry of Unification 135 New Economic Map Initiative: DMZ belt Key takeaways ▶ Create a tourist belt linking Mt. Seorak, Mt. Kumgang, Wonsan, and Mt. Baekdu and develop the DMZ into an ecological reserve and eco-friendly tourist belt Characteristics ▶ Focus on peace and environmental conservation more than on economic development Major projects ▶ Ecological environment conservation Jointly manage shared rivers Designate the area an eco reserve ▶ Peacetime security and ecological tourist spots Peace zone project Open World Eco-Peace Park Set up cultural exchange centers Source: NGII, Ministry of Unification 136 New Economic Map Initiative : Funding, by project type Method of funding to depend on project ▶ Public projects will need to secure the cooperation of the South Korean government and international organizations ▶ The South’s government and private sector should share funding for public-private partnerships based on profitability Project Project target Methods of funding Build and repair roads, railways, and harbors Public financing, international financial institutions, some part can be financed privately Reorganize airport Public and private investment Build and repair power plants and electric grid Private investment, PPP Build communication network Private investment Industrial complex Develop 2nd part of Gaeseong industrial complex and other special economic zones Public and private investment Tourist spot Develop tourist spots in North Korea Private investment Infrastructure 137 New Economic Map Initiative: Comprehensive valuation of major projects The most important and notable projects will take the longest to become feasible ▶ Building trust between two Koreas and related parties is the first step New Project economic map West coast belt East coast belt DMZ belt Level of trust required Level of financial burden of Participants South Korean government Time of realization Shinuiju–Dandong Medium Medium Multilateral Middle phase Pyongyang-Nampo Medium Medium South, North Early phase Gaeseong-Haeju Medium Medium South, North Early phase Late phase West coast of Korea peninsula High High Multilateral (including international organizations) Seorak-Kumgang-Wonsan High High South, North Early phase (pilot) Hamheung-Bujeon plateau Medium Low South, North Early phase Shinpo-Dancheon Medium Medium South, North Early phase Naseon-Cheongjin-Hasan High Medium Multilateral Middle phase Late phase Late phase East coast of Korea peninsula High High Multilateral (including international organizations) Peace zone High High South, North Source: KRIHS(2015), “Strategies of major development projects towards co-prosperities of the Korean peninsula and northeast Asia” 138 Track record Reasons behind previous failures: Lack of confidence; absence of US involvement ▶ Attempts at South-North economic cooperation were aborted due to a lack of confidence ▶ Such cooperation requires US involvement to achieve sustainability and stability Attempt Date Cause of failure Mt. Kumgang tour Jul 2008 A tourist from the South fatally shot by a North Korean soldier General material trade, processing and assembling trade, investment May 2010 The Cheonan attack leads to the suspension of inter-Korean trade Gaeseong Industrial Complex Apr 2013 The North unilaterally declares the suspension of business Gaeseong Industrial Complex Feb 2016 4th nuclear test by the North Source: Ministry of Unification, Samsung Securities 139 Inter-Korean economic cooperation: Increasing investment and future obstacles Transportation infrastructure to link South-North; massive infra investments in the North ▶ Investments by South Korea are inevitable during the first phase ▶ North Korea is to borrow funds from international organizations once it verifiably scraps its nuclear program Institutional barriers to inter-Korean trade and investment ▶ “Inter-Korean economic cooperation agreement” needs to be signed and then approved by the South’s National Assembly ▶ Near elimination of tariffs for South-North trade ▶ Maximum guarantee of security and convenience in terms of transportation and passage ▶ Direct or indirect financial channels between the South and North ▶ Exchange of business people and telecommunication freedom ▶ Institutional and political guarantees for managerial and property rights for firms investing in the North 140 South-North Korea economic integration roadmap Past roadmap was based on unification by absorption → Pursue gradual integration from now Period • 0-5 years • • • • System integration Market integration Infrastructure integration Industry restructuring Expand market economic system & establish foundations for single system Establish foundations for market integration Renovate North Korea’s infrastructure for economic integration* Establish foundations for North Korea’s industrial development* Cultivate human resources* Single logistics system Deregulate for movement of goods and services R&D command center Labor market development • Renovate North Korea’s national highway linked with South Korea* • Repair main railroad* • Renovate base port* • Expand energy supply & repair power plants* • Expand North Korea’s communication network* • Single railroad system • Single energy supply system • Single communication network system Expand privatization in the economy* Cultivate human resources* Develop private economy Build single economic operation system Integrate monetary / financial system • • • • • Complete system integration 6-10 years • Integrate tax / government budget systems • Integrate social welfare systems • Restructure public companies Expand market integration • • • • Stabilize market economy 11-15 years • • • • Develop private economy Restructure public companies Build single economic operation system Integrate monetary / financial systems Build single economic system 16-20 years • Integrate tax / government budget systems • Integrate social welfare systems • Integrate systems based on global standards Build single economic system 21-25 years • • • • • Integrate monetary / financial systems Integrate tax / government budget systems Restructure public companies Complete single economic operation system Integrate social welfare systems Economic system advancement 26-30 years * Short-term priority projects (5 years) • Strengthen national competitiveness by consistent improvement of economic system • System advancement based on global standards Source: KIEP, KIIET (2011) Make capital market in North Korea Deregulate for movement of capital Integrate labor markets Give subsidies to companies that hire North Korean workers Expand market integration • • • • Make capital market in North Korea Deregulate for movement of capital Integrate labor markets Give subsidies to companies that hire North Korean workers Complete market integration • Build single market • Complete single market (capital/labor/goods) Complete market integration • Give subsidies to companies that hire North Korean workers • Develop natural resources • Build single market • Complete single market (capital/labor/goods) Complete market integration • Regional economic cooperation • Incorporate into world economic system Complete economic integration by infrastructure integration • Build / renovate expressways* • Renovate entirely Seoul-Pyeongyang area in Gyeongui Line* • Complete base port development* • Renovate North Korea’s transmission systems* • Expand North Korea’s communication networks* Renovate infrastructure & Boost economic integration • Renovate road system (eg, Wonsan-NajinDumangang)* • Renovate railroad system (eg, Gyeongui and Pyeongla lines)* • Renovate main ports and airports* • Build transmission sites & improve energy supply systems* • Integrate railroad & logistics systems • Build single communication network system Invest for infrastructure for economic growth and integration • Complete renovating road/railroad systems • Complete transmission facilities • Integrate energy supply systems Integrate infrastructure • Integrate transportation & logistics systems • Integrate energy supply systems • Integrate communication network systems Invest in infrastructure for economic growth and integration • Expand investment in transportation, energy, communication services • • • • • • Restore forests & pursue greenification* Rebuild infrastructure for agriculture* Employment for light industry* Rural development (eg, Pyeongyang, Nampo)* Develop natural resources* Restructure heavy industry by attracting foreign capital investment Reallocate South-North Korea industries & operation separating • Rebuild infrastructure for agriculture* • Develop traditional industry complexes (eg, Cheongjin, Hamheung)* • Develop export industries and companies* • Complete heavy industry restructuring • Reallocate South-North Korea industries by comparative advantage Boost North Korea’s industry restructuring • Renovate infrastructure for agriculture* • Privatization of military industry* • Restructure heavy industries Reallocate South-North Korea industries & develop operation separating • Reallocate South-North Korea industries & separate operation systems by private investment in North Korea Restructure & reallocate industries by private investment • Improve competitiveness of heavy industries by restructuring and renovation Industrial policies for consistent growth of integrated economy • Make well-balanced economic policies for SouthNorth Korea overall IV. Appendices IV-1 Moon Jae-in administration’s new economic roadmap initiative for Korean peninsula IV-2. Case studies—market opening in China, Vietnam, and Poland IV-3. Economic comparison of South and North Korea IV-4. North Korea’s financial system IV-5. Others Cases of market opening in China, Vietnam, and Poland Summary ▶ North Korea’s initial market opening conditions are better: ① North Korea’s political system is stable (vs China, Vietnam, and Poland when they opened up—they all suffered from political instability due to systemic crises) as Kim Jong-un and the Communist Party have a strong grip on power. While this strong hold may delay reform, it could be a strong driver for reform given his recent moves (and if he is determined to conduct economic reforms and open the market). ② North Korea’s foreign relations, which effectively came to a standstill in the 2010s, have been rapidly improving since 2018. ③ Considering its geographical location (favorable to international trade), ample mineral resources, stable macroeconomy, and high private portion of the economy, North Korea should enjoy economic reform effects on par with China, Vietnam, and Poland. ④ System rigidity (caused by socialism lasting a long time) can be a structural hurdle to reform, but high education levels and deepening economic/structural imbalances may help accelerate the pace of change. ▶ Korea’s investments in Vietnam and Poland: When Vietnam was in the early stage of reform in the late 1980s and early 1990s, Korean companies invested there in the areas of materials (steel, chemical), industrial goods (construction, machinery, transportation), telecom services, and banking. In 1992, aimed at fulfilling Vietnam’s strong steel demand, Posco set up its first overseas subsidiary (Posvina) in partnership with state-owned steelmaker SSC, and later Posco made investments in other areas including rebar and steal structure production, high-rise residential buildings, and new city developments. In the late 1990s and 2000s, more Korean investments were made in the IT, consumer discretionary, consumer staple, healthcare and insurance sectors. Daewoo Motors led the charge, being one of the first to invest in Poland in 1995. Other Korean firms followed suit after Poland joined the WTO in 2004, and their investments focused on IT and consumer goods manufacturing. ▶ French firms in Poland: Because Eastern European countries’ telecom service industries lagged far behind their military industries in the 1980s and 1990s, loans from international organizations were used to modernize the dilapidated communications infrastructure. France Telecom jumped into the foray, setting up Centertel with state-owned Polish firm TPSA in 1991, helping it secure a first mover’s advantage. Thomson Multimedia, the largest TV tube maker in the 1990s, was quick to build a production base in Eastern Europe after the collapse of communism, picking Poland as its go-to country. It established Thomson Polkolor (a JV with a local TV maker) in 1991 (when Poland started opening its market). Polkolor posted the strongest sales among Polish electronics companies in 1999. 143 Economic reforms and market opening in China ① 1st stage—centered on rural areas (1978~1983): bottom-up approach ▶ Change to collectively-owned township and village enterprises (TVEs). Contributed to economic development in rural regions ▶ Promotion of self-employment and collectively-owned enterprises in urban areas ▶ Partial transfer of managerial power at state-owned enterprises from government officials to corporate managers ▶ Sharing of fiscal income between central and local governments ▶ Establishment of business ties with firms in the US, Japan, and Europe. Permission was granted to create trading firms ▶ Creation of special economic zones and promotion of foreign direct investment (FDI) 2nd stage—centered on urban areas (1984~1988): reform of state-owned firms and corporate systems ▶ Two-tier pricing system: Market prices began playing a bigger role ▶ Partial transfer of managerial power from state-owned firms in return for profit (to the government) ▶ Establishment of financial system comprised of the central bank and four state-owned commercial banks ▶ Opening of 14 cities (on top of existing special economic zones). Designation of coastal areas as economic zones ▶ Official recognition of privately-owned firms (eg, ones owned by an individual and having more than eight employees) via the constitution being reformed in 1988 144 Economic reforms and market opening in China ② 3rd stage—transition phase (1989~1992): reforms temporary setback before being resumed ▶ Tiananmen Square Protest: Triggered by high inflation (on rapid economic growth over 1987~1989) and corruption within the Communist Party ▶ The Chinese government responded by tightening policies and strengthening communist ideology ▶ Price liberalization was sustained: Market prices took firm root, with the two-tier pricing system weakening ▶ The whole nation effectively fully opened, with the last areas (the Yanja River area and large inland cities) also opened 4th stage—system overhaul and strong reforms (1993~2000): shift to market economy more visible ▶ Reform of fiscal system: The introduction of value added tax (1994) and the reform of corporate income tax ▶ Strengthening of central bank independence. Reform of its forex system ▶ Restructuring of state-owned enterprises. Privatization of collective-owned TVEs ▶ Foreign financial institutions permitted to enter China. Permission given to create privately-owned banks 5th stage—completion of system overhaul (2001~present) ▶ Enters WTO—a big step towards trade liberalization ▶ Turned state-owned enterprises and banks into corporations or privately-owned players 145 Economic reforms and market opening in Vietnam ① 1st stage—new economic policy (1979-1985) ▶ Initial reform (collective farming): Individuals or groups leased land usually for two to three years and sold a predetermined amount of agricultural produce to the government before selling the remainder privately ▶ State-owned companies were given autonomy to secure raw materials and sell products on the free market ▶ Wage-related reforms and currency depreciation resulted in high inflation and high macroeconomic uncertainty. The result was the central government gaining greater control over 1983-1984 2nd stage—Doi Moi reforms (1986-1993: free-market economic reforms) ▶ Family farm: Individual farming families began to replace collective farming and the period of leasing land was extended to 10-20 years ▶ Price liberalization: Price controls disappeared for most items (excluding electricity, transport, and fuel) ▶ Fiscal reforms: Subsidies to public enterprises were scrapped and income taxes were introduced ▶ State-owned firms underwent restructuring and independent accounting systems were introduced ▶ Vietnam amended its constitution and enacted a private enterprise law in 1992 ▶ The enactment of related laws and the creation of four state-owned commercial banks demonstrated that it had turned to embrace modern financial systems ▶ Foreign capital laws were enacted ▶ The country withdrew troops from Cambodia and signed the Paris Peace Accords II in 1991 in order to normalize diplomatic relations with the West ▶ Trade liberalization: The government ended its trade monopoly, allowing the creation of new trading companies and the establishment of a tariff system 146 Economic reforms and market opening in Vietnam ② 3rd stage—Reforms stagnate (1994-1998; amid Asia financial crisis hits in 1997) ▶ For the purpose of improving managerial efficiency, the country laid the legal framework to privatize state-owned enterprises and facilitate joint ventures with foreign companies ▶ Improving relations with the US in the early 1990s opened the door for aid from organizations like the IMF and World Bank, and the action also helped the nation attract FDI 4th stage—Integrated into the global economic system and enjoying brisk growth (from 1999) ▶ Small public enterprises that were run by provincial governments were privatized ▶ A switch from licensing to registration gave rise to a boom at private companies in the 2000s ▶ The Ho Chi Minh City and Hanoi stock exchange opened in 2000 and 2005, respectively ▶ The US-Vietnam Bilateral Trade Agreement went into effect in 2001 ▶ Vietnam joined the WTO in 2007 147 Economic reforms and market opening in Poland ① 1st stage—Initial economic reform amid unstable political conditions (1956-1958) ▶ The Front of National Unity won legislative elections in 1957 after huge labor strikes and demonstrations in 1956 ▶ More autonomy was given to firms and incentive payments were linked to wages. Workers were the given right to organize 2nd stage—Attempt to reform under existing system (1965-1968) ▶ Enterprises were allowed to utilize production facilities and equipment at their discretion ▶ Pricing became more market based thanks to: 1) an improving trading system; and 2) stronger connections between domestic manufacturers and trading firms 3rd stage—Seeking endogenous growth (1971-1975) ▶ Poland emphasized modernization, technological advancement, and economies of scale to achieve endogenous growth ▶ Product prices used to depend on production costs, but they began to be determined by demand and by the free market (ie, by prices of items offered domestic and foreign rivals) ▶ Incentives to workers were linked with business performance ▶ Companies were given more autonomy with regard to production and investment decisions * A wide range of efforts were made in each of the three stages, but reform efforts had limitations due to intervention by the central government * From 1976, the centralization of power reappeared and economic conditions worsened 148 Economic reforms and market opening in Poland ② 4th stage—Balcerowicz plan (first program aimed at transitioning to market economy; 1989~1991) ▶ After decades of communist rule, Poland’s economy suffered a chronic economic recession, which led to a democratic government being elected (the first non-communist regime in Eastern Europe) ▶ Balcerowicz’s plan was shock therapy, designed to rapidly transition the country from a communist-orientated economy (one based on state ownership and central planning) to a capitalist-orientated market economy ▶ Reform was characterized by two stages: 1) the first part focused on economic stabilization via the recovery of market prices, liberalization of economic activity, tax reform, fiscal stability, rediscount rate hikes, trade growth, and lower inflation; and 2) the second stage focused on restructuring the system via the introduction of a private property system, antitrust policies, more tax reforms, and the creation of capital markets 5th stage—stabilization of macroeconomy and privatization of public enterprises (1993-2003) ▶ Thanks to the Balcerowicz plan, inflation plunged from 700% in 1989 to 1.8% (as of August 1991) ▶ However, strong credit tightening gave rise to a transformation recession (characterized by depressed demand. Balcerowicz was forced to resign in 1993 and the communist party came back to power ▶ Privatization-related laws were enacted in 1990 ▶ State-owned enterprises were privatized via disposal, rental, or certificate sale ▶ Western European countries took part in privatization in the country from the mid-1990s 149 Previous market openings: Initial conditions ① political China Vietnam Poland Severity of regime instability • Failure of socialist-state-construction policy • Political/economic/social instability up following Vietnam War following failure of Mao Zedong’s Great • Relations with China and the West Leap Forward and Cultural Revolution deteriorate upon invasion of Cambodia • Economic growth strategy focused on heavy • Economic conditions dismal due to longand chemical industries reveals problems running war • Democratization movement triggered • Food shortages and inflation at serious following death of Mao Zedong levels during late 1970s • Eastern European states in crisis due to socialism’s structural economic inefficiency • Collapse of ideological basis; acceleration of system collapse Political leadership stability • Deng Xiaoping leadership takes helm • Pursues target-driven economic reform strategy ( “Doesn't matter whether a cat is black or white, as long as it catches mice”) • Transition from one-person to collective leadership system • Polish Round Table Talks (1989) • Solidarity wins landslide victory in 1989 legislative election, leading to Eastern Europe’s first non-communist government Communist Party’s administrative ability • Collective leadership system remains stable • Shift to collective leadership system implemented in 1969 following death of Ho Chi Minh • Communist Party secured high political authority as it developed over a long period of time while combating overseas forces and existing vested rights • Democratization movement not threatening as neither nation has experience of modern democracy (vs countries in the West) • Internal solidarity of elite bureaucrats strong • Communist Party unstable due to prolonged recession, frequent riots, leadership change • Workers’ riot triggered by food price hikes led to leadership change in the 1970s • Democratization movement spreads in the 1980s 150 Previous market openings: Initial conditions ② external relations China Vietnam • Has poor foreign relations (vs China’s) • Seeks detente with US and China even before reform and market opening in early 1970s Improvement in external relations • Establishes relations with Japan (1972), Europe(1975) and US (1979) • Signs trade treaties with Japan (1974), Europe (1978), and US (1979) • Relations with the West and China bad during early 1980s; heavily dependent on Soviet Union for assistance • Seeks Doi Moi reforms in late 1980s; assistance from Soviet Union dwindling • Relations normalize from mid-1995 following withdrawal from Cambodia; Trade with US normalizes from 2000 • Strives to expand exchange with Taiwan and Hong Kong Ethnic/ unification issues • Exchanges with the two nations pose no serious threat to China given the latter’s overwhelming economic size • Expands exchange alongside economic reform; wage unification attempts Poland • Collapse of Communism: trade among Eastern European nations contracts due to collapse of Council for Mutual Economic Assistance (Comecon) • Activation of trade with Western countries: Poland rapidly becomes a member of the international community on the back of financial assistance from IMF and IBRD from 1990 • Unifies divided nation after wining longrunning war with US • Promotes socialism in southern part of Vietnam, causing economic hardship and • N/A citizens’ grievances in the region • Consensus built for need of economic reform 151 Previous market openings: Initial conditions ③ economics China Instability of macro economy • Inflation and forex rate stable during initial phase of economic reform • Economic chaos insignificant Vietnam • Fiscal deficit sustained due to long-lasting war • Increased currency issuance to make up for fiscal deficit; suffers high inflation • Consequently, seeks more radical economic reforms than China did • Has ample natural resources; utilizes them well during economic reform period Geographica • Expands trade with Asian and Western countries thanks to borders having large coastlines; attract FDIs l conditions • Located closer to market economies than the Soviet Union and East European nations are Private portion of economy • Private portion of economy low during initial phase of socialism due to strong control • Private economy starts growing in rural areas from late 1970s • Street vendors appear in urban areas • Private portion of economy high (vs China’s) due to relatively short history of socialism • Mining sector controlled by state-owned firms, but commercial/service/manual industries vibrant with private businesses Poland • Suffers from falling economic growth and near 700% inflation during 1970s • Soaring unemployment; chronic trade deficit • Located in the middle of Eastern and Western Europe, thus closer to Scandinavia and the North Sea • Has ample mineral and agricultural resources; exports those resources • Private portion of economy high compared to other socialist nations • Non-state-owned firms account for more than 30% of GDP in 1981; private farmland ownership reaches 75% in 1982 152 Previous market openings: Initial conditions ④ structural aspects China Vietnam Poland • Secondary school enrollment rate 46% in China in 1980, and 33% in Vietnam in 1990 • Dependency ratio—age-population ratio of those typically not in the labor force (dependents: aged 0 to 14 and 65+) and those typically in the labor force (productive: aged 15 to 64)—very high in China and Vietnam during initial phase of reform, but continuously down over a long period of time alongside economic reforms • Secondary school enrollment rate of 87% in 1989 • Dependency ratio not very high • Rural portion of the economy high; state-ownership portion low in urban areas—unlike the Soviet Union and Eastern Europe • China: Limited migration of rural workers to urban areas via household registration system during period of socialist state construction • Vietnam: State ownership not high due to long-fought war and short history of socialism • Urbanization level high under Communist Party due to focus on industrialization • Urbanization level high compared to China and Vietnam Level of political power centralization • China: Political power decentralized due to sheer size of the nation and lack of administrative capabilities • Vietnam: Planned economy system not sufficiently developed due to short history of socialism • Low level of industrialization (vs Soviet Union and Eastern Europe) positive for economic reforms • Centralization low compared to other Eastern European socialist nations • Centralization further weakened after 1980s due to prolonged recession Trade; socialist history • Trade with socialist nations insignificant • Socialism adopted 30 years ago • Socialism sustained for 45 years until Solidarity’s ascent to power • Trade with socialist nations sharply reduced since launch of economic reforms Human resources and demographics State ownership and vested rights • Trade portion of GDP low • Socialist history shorter than China’s 153 North Korea market opening: Initial conditions ① political Severity of regime instability: Stable compared to regimes in China, Vietnam, and Poland, but still burdensome given prolonged economic sanctions against the nation ▶ Dictatorship remains solid amid strong political/ideological control ▶ North Korea suffered collapse of Communist bloc in the 1990s, floods over 19951996, and great famines over 1994-2000 ▶ Economy improved from 2000s thanks to assistance from international community ▶ However, North Korea has been under strongest economic sanctions since 2010 amid deterioration in foreign relations Political leadership stability: A dictator’s strong grip on power can be a reform-accelerating factor if he is determined and capable ▶ Dictatorship has been sustained over 70 years ▶ No change in leadership can make reform difficult… ▶ …but it can also maximize reform effects if the dictator is determined and capable Communist Party’s administrative ability: Relatively stable ▶ Ruling class in North Korea’s Communist Party secured political authority following the Korean War and during post-war reconstruction period ▶ The Party has strengthened integral unity by purging political enemies on several occasions ▶ However, the Party has no experience with the democratic form of government 154 North Korea market opening: Initial conditions ② external relations Improvement in external relations: Rapid improvement in 2018 positive ▶ Foreign relations improved until the early 2000s thanks to increased assistance from the international community following the great famine in the mid-1990s ▶ Foreign relations came to a standstill from 2010 to end-2017 due to heightened tensions over the nuclear issue ▶ External relations have rapidly improved in 2018, as evidenced by the North Korea-US summit in June Ethnic/unification issues: Concerns ▶ Expansion of inter-Korean exchanges could pose a threat to the North Korean regime as North Korea’s economy lags far behind South Korea’s ▶ North Korea’s ruling party may worry that it will suffer the same fate as East Germany’s—ie, the ruling class’s collapse after West Germany’s unification by absorption ▶ But, reform and market opening in North Korea should proceed under mutual agreement and assurances of regime persistence 155 North Korea market opening: Initial conditions ③ economics Instability of macro economy: Macro economy relatively stable despite prolonged sanctions ▶ Economic growth slows in the 2010s, but the 2016 figure of 3.9% was a post-2005 high ▶ Rice prices and forex rate stable due to currency reform and reduced government interference in market price s ▶ Still, economic and trade structure poor—eg, geared towards primary industries; attraction of FDI lackluster ▶ This, in the face of introduction of market economy systems, owes to prolonged sanctions Geographical conditions: Well located for trade & has ample mineral resources ▶ Located close to China, South Korea, and Japan—good for trade and FDI attraction ▶ Rich in mineral resources: ranked 6th in the world in terms of gold reserves and 3rd in terms of magnesite reserves ▶ On par with Poland in terms of natural resource competitiveness, but inferior to China and Vietnam as North Korea produces no petroleum Private portion of economy: High ▶ Private portion of economy up sharply following economic crisis in the 1990s ▶ Private economy already accounted for 30-50% of total employment over 2003-2004 ▶ Private sector has accumulated assets under Kim Jong-un’s leadership amid rapid market opening ▶ Private portion of economy on par with Vietnam’s and Poland’s (vs China’s) 156 North Korea market opening: Initial conditions ④ structural aspects Human resources and demographics: Education level high ▶ Education level higher in North Korea than in China, Vietnam, and Poland; North Korea’s secondary school enrollment rate already at 96% at end-1980s; illiteracy rate nearly zero ▶ The dependency ratio in China and Vietnam has kept falling, but the figure has not done so in North Korea since the 1990s Level of state ownership and urbanization: Urbanization level low outside of Pyongyang ▶ State ownership level in urban areas was high during the period of socialist state construction ▶ Vested rights, however, largely disappeared following the economic crisis and great famine (until 2000) ▶ Livelihood levels low in most small and medium cities Level of political power centralization: High ▶ North Korea set up a highly centralized planned system in the 1960s ▶ Although its political system has been substantially decentralized since the 1990s, it remains rigid compared to China’s, Vietnam’s, and Poland’s Trade portion of national economy and history of socialism: Economy has little exposure to trade; 70 years of socialism ▶ North Korean economy has low exposure to trade following early-1990s collapse of Soviet Union ▶ Socialism has lasted more than 7 decades in the nation, the second-longest following the Soviet Union 157 North Korean GDP growth, with reference to other nations What if North Korea grows as quickly as China and Vietnam did? ▶ China and Vietnam both have sustained robust growth of over 5% pa since early stages of reform and market opening. If North Korea enjoys similar growth, its economy could double or triple in ten years. ▶ The economic gap between North and South Korea should keep narrowing, but may not close even 40 years after reform. North Korea: Estimate of GDP growth after economic reform (KRWt) 1,800 South Korea GDP (2016) 1,600 1,400 Following China's growth rate 1,200 1,000 800 600 400 Following Vietnam's growth rate 200 0 Y0 Y3 Y6 Y9 Y12 Y15 Y18 Y21 Y24 Y27 Y30 Y33 Y36 Y39 Note: Growth rate of China used from 1978, when China began first stage of economic reform; Growth rate of Vietnam used from 1986, when Vietnam adopted Doi Moi reform Source: CEIC, BOK, Samsung Securities 158 Korean investments in Vietnam ① Korea began to invest in Vietnam, starting with textile and sewing businesses ▶ Korea normalized relations with Vietnam in 1992, and Hanju (sewing company) was the first firm to make investments officially in Vietnam ▶ Posco, Daewoo, Samsung, and LG embarked on investments at group level Investments broadened to include steel, construction materials, hotel, and electronics businesses ▶ Posvina (a Posco JV, founded in 1993) began operations ▶ Then, Posco and Seah Steel started long-product businesses in Vietnam ▶ Hyosung and Kolon set up production lines for polyester-based synthetic textiles and LG did so for the PVC business Currently, Samsung and LG represent a large portion of Korean investments in Vietnam ▶ Korea’s electronics-related investments in Vietnam have exceeded USD20b Korean firms’ exports account for more than a quarter of Vietnam’s total exports Korea is ranked top in the number and value of foreign investments in Vietnam ▶ Samsung and LG make up the largest portion of Korean investments in Vietnam Thai Nguyen: Samsung Electronics (handset plant), Samsung Electro-Mechanics, Samsung Display Samsung Electronics Ho Chi Minh City Complex, and Samsung R&D center Hai Phong: LG Electronics and LG Display 159 Korean firms operating in Vietnam—Posco Posco’s investment aimed at fulfilling Vietnam’s strong steel demand in early stages of economic growth ▶ In 1992, Posco set up its first overseas subsidiary, Posvina, in partnership with state-owned steelmaker SSC ▶ The subsidiary produced galvanized steel sheets, which are usually in strong demand in the initial stages of economic development ▶ Posco close old facilities in Korea, where demand for galvanized steel sheets had weakened, and relocated them to Vietnam ▶ Later, the Korean steelmaker invested in other areas, including rebar & steel structure production, high-rise residential buildings, and new-city development Posco: Investments in Vietnam in 1990s Posvina VPS Posvina: Earnings IBC Poslilama (USD 10k) (USD 10k) Net income (RHS) 4,000 Established 1992 1994 1995 1995 450 3,500 400 3,000 Products Production volume Capital stock Galvanized steel Timber, sheets steel bars (sheet zinc) 45,000 tonnes Residentialcommercial complexes 200,000 tonnes - Steel structures 350 2,500 300 2,000 - Sales (LHS) 1,500 USD17b USD23b USD8b 35% 60% 60% Source: Seri (2001), Samsung Securities 200 100 500 50 0 Posco’s stake 50% 250 150 1,000 USD4b 500 0 1992 1993 1994 1995 Source: Seri (2001), Posvina, Samsung Securities 160 Cases of expansion toward Vietnam: Korean firms (1) Sector Korean company Vietnam ese company Year Sector Materials CS Holdings Chosun Vina 2008 Materials KCC KCC(Vietnam) Materials KCC KCC Ha Noi Materials LG Chem Materials Korean company Vietnamese company Year Industrials LS Industrial Systems LS Vina Industrial Systems (LsisVina) 1997 2007 Industrials LS Industrial Systems Lsis (Rep. Office) 2011 2014 Industrials SK Networks Sk Networks(Hcmc Rep. Office) 1991 LG Vina Chem 1995 Industrials Kishin Kishin Vietnam 2015 Daehan Steel Staz Vietnam 2013 Industrials Nam Kwang E&C Namkwang E&C 2007 Materials SeAH Steel Vietnam Steel Pipe Company 1993 Industrials Noroo Paint & Coatings NorooNanpao Paint & Coatings 2008 Materials SeAH Steel Seah Steel Vina 1995 Industrials Daelim Industrial Daelim ENC 2008 Materials AK Petrochemical AK Vina 2003 Industrials Daelim Industrial Daelim Industrial 2012 Materials YMT YMT Vina 2015 Industrials Taihan Electric Wire TaihanSacom Cable Hochiminh city 2006 Materials Chin Yang Industry Vina Foam 1996 Industrials Korean Air Korean Air(Hcmc Branch Office) 1993 Materials Posco VSCPosco Steel 1994 Industrials Korean Air Korean Air Hanoi Office 2001 Materials Posco VSCPosco 1995 Industrials Dong Bang Dongbang Logistics Vina 2006 Materials Posco Posco Vietnam 2006 Industrials Dong Bang Dongbang Vina Korea 2012 Materials Posco Posco 2006 Industrials DRB Industrial Dongil Rubber Belt 2006 Materials Posco Posco Vietnam Processing Center 2007 Industrials DRB Industrial Dongil Rubber Belt Vietnam 2008 Materials Hyosung Hyosung Corporation Hcmc(Rep. Office) 1991 Industrials DHIC Doosan Vina Haiphong 1995 Materials Hyosung Hyosung Vietnam Dong Nai 2007 Industrials DHIC Doosan Heavy Industries Vietnam 2006 Industrials CJ Logistics CJ GLS Freight Vietnam 2002 Industrials DHIC Doosan Heavy Industries 2007 Industrials CJ Logistics CJ Korea Express Freight Vietnam 2002 Industrials Samsung C&T Samsung C&T Hanoi Office 1989 Industrials CJ Logistics CJ GLS VN Freight Hanoi Branch 2008 Industrials Samsung C&T Samsung C&T Hcmc Office 1990 Industrials CJ Logistics CJ Vrg Port & Logistics Jsc 2014 Industrials Samsung C&T Samsung Logistics Hanoi 2009 Industrials GS E&C GS E&C 1993 Industrials Samsung Engineering Samsung Engineering 2001 Industrials GS Global GS Global 2004 Industrials CS Wind CS Wind Vietnam 2003 Industrials LG International LG International Corp.(HCM Office) 1990 Industrials Asiana Airline Asiana Airlines 1993 Industrials LS Industrial Systems Lsis Vina 1997 Industrials Asiana Airline Asiana Airlines Hanoi Office 2003 161 Cases of expansion toward Vietnam: Korean firms (2) Sector Korean company Vietnamese company Year Sector Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer staples Consumer staples Consumer staples Consumer staples Consumer staples Consumer staples Consumer staples Consumer staples Consumer staples Consumer staples Industrials IS Dongseo IS Dongseo 2000 Industrials Cho Kwang Paint Chokwang Vina 2007 Industrials Posco Daewoo Posco Daewoo International 1991 Industrials Hanjin Shipping Hanjin Shipping Vietnam 2005 Industrials Hyundai E&C Hyundai E&C 1994 Industrials Hyundai Merchant Marine Hyundai Merchant Marine Vietnam 2007 Industrials Hyundai Heavy Industries Nhat Lo Phat 168 2001 Industrials Heung-A Shipping HeungA Shipping Vietnam 2008 CJ O Shopping SCJ Tv Shopping 2011 CJ O Shopping CJ Imc Vietnam 2011 Kyung Bang Kyungbang Vietnam 2008 Kumho Tire Kumho Tire(Vietnam) 2006 Noroo Paint & Coatings Noroo Vina 2011 Lock&Lock Lock & Lock Vina 2007 Lock&Lock Living & Life Vina 2010 Lotte Mart Lotte Mart 2014 Lotte Shopping Lotte Vietnam Shopping 2006 Lotte Shopping Lotte Cinema Vietnam 2008 Lotte Shopping Lotte Vina International 2009 Lotte Shopping Lotte Department Store 2011 Shin Sung Tong Sang Shinsung Vina 2003 Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Consumer discretionary Shin Won Shinwon Ebenezer Viet Nam 2002 Youngone Youngone Namdinh 2003 E-Mart Emart Vietnam 2009 Cheil Worldwide Cheil Vietnam 2002 Korean company Vietnamese company Year Cheil Industries Samsung Cheil Industries Vietnam 2013 Hana Tour Service Hanatour Vietnam 2012 Hansae Hansae 2002 Hansae Hansae Vietnam 2003 Hansae Hansae Tn 2005 Hansae Hansae TG 2012 Hyundai Livart Livart Vina 2006 Hyundai Livart K&D Seoul Furniture 2013 Hyundai Motors Hyundai Motors 2006 CJ CheilJedang CJ Vina Agri 1999 CJ CheilJedang CJ Vina Agri Hung Yen Branch 2005 CJ CheilJedang CJ Vietnam 1998 CJ CheilJedang CJ Bakery Vietnam 2007 CJ CheilJedang CJSC Global Milling 2013 LG H&H LG Vina Cosmetics 1997 Ottogi Foods Ottogi Vietnam 2007 Ottogi Foods Ottogi Vietnam 2007 Orion Orion Food Vina 1997 Woo Sung Feed Woosung Vina 2002 Health care Daewoong Pharmaceutical Daewoong Pharmaceutical 2004 Health care Sewoon Medical Sewoon Medical Vina 2013 Health care Osstem Implant Osstem Implant 2011 Financials Industrial Bank of Korea Industrial Bank Of Korea Hcmc Branch 2008 Financials Industrial Bank of Korea IBK Hanoi Bank 2013 Financials KB Financial Group Kookmin Bank Hcmc Branch 2007 162 Cases of expansion toward Vietnam: Korean firms (3) Sector Korean company Vietnamese company Year Sector Korean company Vietnamese company Year Financials KB Financial Group KB Kookmin Bank Hanoi 2011 IT Jahwa Electronics Jahwa Vina 2007 Financials Mirae Asset Daewoo Daewoo Securities (Hcmc Rep. Office) 2007 IT Korea Computer Terminal KCT Vina 2015 Financials Hana Financial Group Korea Exchange Bank, Hanoi 1995 IT Power Logics Power Logics Vina 2014 Financials Hanwha Life Korea Life Insurance 2005 IT Partron Partron Vina 2010 Financials Mirae Asset Daewoo Mirae Asset Maps Global Investment 2007 Utilities Kepco Korea Electricity Power 2004 Financials Mirae Asset Daewoo Mirae Asset Securities(Vietnam)Jsc 2007 Telecom KT KT Corporation Vietnam 1995 Financials Samsung Life Samsung Life Insurance Hanoi 2008 Telecom KT KT Hanoi Office 1995 Financials Samsung Fire & Marine Samsung Vina Insurance 2001 Telecom SK Telecom SK Telecom (Hcmc Rep. Office) 2012 Financials Samsung Fire & Marine Samsung Vina Insurance 2002 Financials Shinhan Financial Group Shinhan Securities Vietnam 2010 Financials Shinhan Financial Group Shinhan Bank 1993 Financials Shinhan Financial Group Shinhan Bank Vietnam 1993 Financials Shinhan Financial Group Shinhan Bank Vietnam Dong Nai Branch 2011 Financials Woori Bank Woori Bank Hanoi Branch 1997 Financials Hanwha Life Hanwha Life Insurance 2008 Financials Hanwha Life Hanwha Life Insurance Vietnam 2008 IT LG Electronics LG Electronics(LGevn) 1995 IT LG Electronics LG Electronics(LGevn) 1995 IT LG Electronics LG Electronics Vietnam 1995 IT LG Electronics LG Electronics Vietnam 1997 IT Samsung Electronics Samsung Electronics Hcmc Ce Complex 1996 IT Samsung Electronics Samsung Vina Electronics Main Office 1996 IT Samsung Electronics Samsung Electronics Vietnam 2009 IT Sekonix Sekonix Vina 2014 IT Synopex Synopex Vina 2014 163 Cases of expansion toward Vietnam: VC with foreign firms after joining WTO in 2007 Project • Samsung Electronics Thai Nguyen factory (USD5b) • Samsung Electronics Bắc Ninh factory (USD2.5b), Hồ Chí Minh home appliances factory (USD2b), Semco Bắc Ninh factory (USD1.2b) • LG Electronics (USD1.5b), LG Display (USD1.5b) • Posco Vũng Tàu cold-rolled plate factory (USD1.7b) • Formosa(Taiwan) Ha Tinh steel complex (USD22b) • Nghi Son refinery factory in collaboration with Japan, Kuwait, and Vietnam (USD9b) • Asian Coast Development Group (Canada) Ho Tram Tourism complex in Thành phố Vũng Tàu • Refinery/chemical complex in Thành phố Vũng Tàu in collaboration with Thailand and Vietnam (USD4b) • Berjaya Group (Malaysia) Hồ Chí Minh university city (USD3.5b) • China Vĩnh Tân thermal power plant (USD2b) • AES-TKV (Netherlands) Mong Duong thermal power plant (USD2.1b) • Starbay Holdings (British Virgin Islands) Kiên Giang resort including golf course and silver town (USD1.648b) • Good Choice Group (US) resort and luxury hotel in Thành phố Vũng Tàu (USD1.299b) • TA Associates (Singapore) Vietnam VC Thu Thiem software complex in Hồ Chí Minh (USD1.2b) • Bridgestone (Japan) Hải Phòng factory (USD1.2b) 164 Korean investments in Poland Korean companies began to enter Poland in 1990 ▶ Korean investments surged after 2004 when a rising number of Eastern European countries joined the EU. ▶ Such investments were aimed at: 1) establishing production bases to have better access to the EU market; and 2) participating in EU-financed public projects. Korean firms establish production lines ▶ Daewoo bought 60% of Poland’s state-owned carmaker FSO for USD1.1b in 1995 and started building a presence (alongside its suppliers) in the European country. ▶ After Poland became an EU member state in 2004, LGE began to invest there in 2005 and LGD followed suit in 2006. ▶ Samsung Electronics set up an overseas consumer electronics subsidiary in Poland in 2010. ▶ Mando made forays into the country in 2011 and other auto-part makers (eg, Hanil E-Hwa) followed suit in 2012. ▶ In 2016, LG Chem broke ground to build Europe’s largest-capacity EV-use battery plant. ▶ Large Korean firms including Samsung Electronics, LGE, Hyundai Motor, Kia Motors, and Daewoo International operate sales subsidiaries or have offices in Poland. Participation in public projects ▶ In 2012, Posco E&C won a USD250m project to build an incineration plant in Poland. ▶ That same year, a consortium led by KT and Daewoo International took a KRW23b order to establish internet networks in Podlaskie province. 165 Foreign firms operating in Poland—Daewoo Motors Faced with domestic market saturation, Daewoo Motors explored overseas business opportunities ▶ Daewoo hoped to build a presence in a European nation (but not a developed country) with solid growth potential and cheap labor. It chose Poland, which: 1) was the 8th-largest market in EU at that time; and 2) is situated on the border of Western and Eastern Europe and was expected to join the EU. Daewoo enjoyed stellar performances in Poland until the Daewoo crisis began. ▶ Daewoo established Daewoo-FSO in 1996 in partnership with state-owned carmaker FSO. At that time, it competed with Hyundai Motor, GM, and Rover to ink the deal, but it was able to buy 60% of FSO on condition of maintaining employment levels. ▶ The subsidiary received the Polish Quality Award in 1998 and was ranked top in terms of net profit among Polish firms that year. It also had the largest domestic market share in 1999. ▶ Daewoo-FSO was the largest overseas factory Daewoo Group had under its World Management strategy. ▶ The remarkable performance of Daewoo Motors enabled other Korean firms to induce cooperation easily from the Polish government and municipal authorities. ▶ Even though Daewoo Group began a workout program in 1998, its operating results in Poland hit record highs in 1999. 166 Foreign firms operating in Poland: Korean firms Sector Korean company Polish company Year Sector Materials LG Chem LG Chem Poland 2005 Materials Posco Posco PWPC 2006 Materials Posco Daewoo Posco Daewoo Poland 1991 Materials Lotte Chemical Lotte Chemical Poland 2013 Materials Sam Hwa Capacitor Samhwa Poland Industrials Posco E&C Industrials Korean company Polish company Year Consumer Cheil Worldwide Discretionary Cheil Germany GMBH 2009 Consumer Hyundai Motor Discretionary Hyundai Motor Poland 2000 Financials Shinhan Financial Group Shinhan Bank Przedstawicilstwo W Polsce 2014 2007 IT LG Display LG Display Poland 2005 Posco E&C 2013 IT LG Innotek LG Innotek Poland 2005 Dae Won Kang Up Daewon Europe 1997 IT LG Electronics LG Electronics Polska 1995 Industrials Hanjin Shipping Hanjin Shipping Poland 2003 IT LG Electronics LG Electronics Mlawa 1999 Consumer Discretionary LG Electronics Inc. LG Electronics Wroclaw 2005 IT Samsung SDS Samsung SDS Global Scl Poland 2014 Consumer Discretionary S&T Motiv S&T Motiv Polska 2007 IT Samsung Electronics Samsung Electronics Poland 2002 Consumer Discretionary IT Samsung Electronics Samsung Electronics Poland MFG 2009 Kia Motors Kia Motors Polska 1997 IT Sekonix Sekonix Poland 2016 IT Humax Humax Poland 2006 Telecom KT KT Corporation Oddział W Polsce 2013 Consumer Discretionary Mando Consumer Discretionary Seoyon Ehwa Mando Poland Seoyon E Hwa Poland 2011 2012 167 Foreign firms operating in Poland—France Telecom Polish government focuses on telecom services early on ▶ Eastern European countries’ telecom services industries at that time lagged far behind their war industries. Telephone penetration in Poland was only 9%, far below the averages of Eastern Europe (13%) and the EC (38%). ▶ Most telecom service equipment (excluding military-use gear) was used first to modernize the old telecom service infrastructure. dilapidated. Loans from international organizations were France Telecom makes forays into mobile telco market ▶ France Telecom set up Centertel with state-owned Polish firm TPSA in 1991. Poland’s first mobile service provider was given the right to operate a nationwide analogue network for 25 years. In 1996, it obtained the right to operate a digital network. ▶ Centertel is a good example of success via first mover’s advantage and making good use of program loans from international organizations. 168 Foreign firms operating in Poland—Thomson Multimedia Thomson Multimedia was quick to exploit market openings in Eastern European countries ▶ Thomson Multimedia was the world’s largest TV tube manufacturer in the 1990s. ▶ The French company made a plan to build its production base in Eastern Europe, which it expected to build a market economy on the collapse of communism. Considering transportation costs, it picked Poland, the closest Eatern state to Western Europe. ▶ It established Thomson Polkolor (a JV with a local TV maker) in 1991 when Poland started its market opening. Good case of success based on swift acquisition of state-owned firm and creation of stable production base that has easy access to Western European markets ▶ Polkolor evolved into a fully-integrated tube plant in just three years and exported 70% of its products to Thomson’s TV plants overseas. ▶ It posted the largest sales among Polish electronics companies in 1999. 169 IV. Appendices IV-1 Moon Jae-in administration’s new economic roadmap initiative for Korean peninsula IV-2. Case studies—market opening in China, Vietnam, and Poland IV-3. Economic comparison of South and North Korea IV-4. North Korea’s financial system IV-5. Others Economic comparison of South and North Korea Summary ▶ North Korean population half that of South Korea: North Korea has a population of 25m, just half that of South Korea (as of 2016). The two countries’ population ratio fell from 2.12x in the 1990s to a record-low of 2.04x in 2007, before gradually rebounding. North Korea’s population is skewed towards younger people (aged 20 and younger) and has a low portion of people aged 50 and above. But, due to sustained conditions negative to child birth and nurturing (eg, economic crisis in the 1990s and the Arduous March in 1998), it does not have the triangular-shaped population pyramid that is typical of developing nations,. ▶ North Korea’s GDP one 45th that of South Korea’s: North Korea’s GDP stood at KRW36t in 2016, one 45th that of South Korea’s KRW1,640t. Its per capita GNI stood at KRW1.46m, one 22nd that of South Korea’s KRW32m. The North Korean economy barely grew in the 1990s and then expanded at rates of between -1% and +3% during the 2000s. Growth was stuck at the 1% level after 2010, though it jumped sharply to 3.9% in 2016. North Korea’s trade value is one 140th that of South Korea’s, and 97% of this comes from transactions with Asian nations (especially China). ▶ Primary industries account for more than 30%; industrial output gap with South Korea massive: Agriculture, forestry, fisheries, and mining account for more than 30% of North Korea’s economy (vs less than 5% in South Korea), and services account for more than 30% (vs more than 50% in South Korea). Light industry, and heavy and chemical industries take up a respective 6.9% and 13.7%. The output gap with the South in high-value-added industrial goods is massive. Vehicle and steel output in South Korea is 1,057x and 56.4x as much as North Korea’s, respectively. 171 Comparison of North and South Korea (1) Indicator Population Nominal GNI GNI per capita North /South Unit North (A) 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 ‘000 people 24,897 24,779 24,662 24,545 24,427 24,308 24,187 24,062 23,934 23,849 23,707 23,561 23,411 23,254 23,088 22,902 South (B) ‘000 people 51,246 51,015 50,747 50,429 50,200 49,937 49,554 49,308 49,055 48,684 48,438 48,185 48,083 47,892 47,645 47,370 Ratio (B/A) x 2.1 2.1 2.1 2.1 2.1 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.1 North (A) KRWt 36.4 34.5 34.2 33.8 33.5 32.4 30.0 28.6 27.3 24.8 24.4 24.8 23.8 21.9 21.3 20.3 South (B) KRWt 1,639.1 1,568.4 1,490.8 1,439.6 1,377.5 1,332.7 1,265.3 1,151.7 1,104.5 1,043.3 966.1 919.8 876.0 810.9 761.9 688.2 Ratio (B/A) X 45.0 45.5 43.6 42.6 41.1 41.1 42.2 40.3 40.5 42.1 39.6 37.1 36.8 37.0 35.8 33.9 North (A) KRW 10k 146 139 139 138 137 133 124 119 114 104 103 105 102 94 92 89 South (B) KRW 10k 3,198 3,074 2,938 2,855 2,772 2,685 2,556 2,330 2,251 2,136 1,987 1,894 1,818 1,687 1,593 1,443 Ratio (B/A) x 21.9 22.1 21.1 20.7 20.2 20.1 20.6 19.6 19.7 20.5 19.3 18.0 17.9 17.9 17.2 16.3 North (A) % 3.9 (1.1) 1.0 1.1 1.3 0.8 (0.5) (0.9) 3.1 (1.2) (1.0) 3.8 2.1 1.8 1.2 3.8 South (B) % 2.8 2.8 3.3 2.9 2.3 3.7 6.5 0.7 2.8 5.5 5.2 3.9 4.9 2.9 7.4 4.5 Economic growth Note: 2016 data are preliminary figures Source: BOK, Samsung Securities 172 Comparison of North and South Korea (2) Indicator Total trade Export International economy Import North/ South Unit 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 North (A) USD100m 65.3 62.5 76.1 73.4 68.1 63.6 41.7 34.1 38.2 29.4 30.0 30.0 28.6 23.9 22.6 22.7 South (B) USD100m Ratio (B/A) x North (A) USD100m South (B) USD100m Ratio (B/A) x North (A) USD100m South (B) USD100m Ratio (B/A) x North Exchange (A) rate with USD KPW /USD South (B) KRW /USD 9,016.2 9,632.6 10,981.8 10,752.2 10,674.5 10,796.3 8,916.0 6,866.2 8,572.8 7,283.3 6,348.5 5,456.6 4,783.1 3,726.4 3,146.0 2,915.4 138.1 154.1 144.3 146.5 156.7 169.8 213.8 201.4 224.4 247.7 211.6 181.9 167.2 155.9 139.2 128.4 28.2 27.0 31.6 32.2 28.8 27.9 15.1 10.6 11.3 9.2 9.5 10.0 10.2 7.8 7.4 6.5 4,954.3 5,267.6 5,726.6 5,596.3 5,478.7 5,552.1 4,663.8 3,635.3 4,220.1 3,714.9 3,254.6 2,844.2 2,538.4 1,938.2 1,624.7 1,504.4 175.7 195.1 181.2 173.8 190.2 199.0 308.9 343.0 373.5 403.8 342.6 284.4 248.9 248.5 219.6 231.4 37.1 35.6 44.5 41.3 39.3 35.7 26.6 23.5 26.9 20.2 20.5 20.0 18.4 16.1 15.2 16.2 4,061.9 4,365.0 5,255.1 5,155.9 5,195.8 5,244.1 4,252.1 3,230.8 4,352.7 3,568.5 3,093.8 2,612.4 2,244.6 1,788.3 1,521.3 1,411.0 109.5 108.40 122.6 108.80 118.1 99.80 124.8 99.70 132.2 101.50 146.9 98.30 159.9 101.30 137.5 134.20 161.8 176.7 150.9 130.6 140.00 122.0 139.00 111.1 100.1 87.1 145.00 2.21 (1~6) 153.00 (7~12) 2.21 130.00 135.00 141.00 1,160.50 1,131.25 1,053.04 1,095.04 1,126.88 1,108.11 1,156.26 1,276.40 1,102.59 929.20 955.51 1,024.31 1,144.67 1,191.89 1,251.24 1,290.83 Note: 2016 data are preliminary figures Source: BOK, Samsung Securities 173 Comparison of North and South Korea (3) Indicator Budget* North /South Unit North (A) South (B) 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 USD100m 73 69 71 68 62 58 52 37 35 32 30 29 25 n/a n/a 98 USD100m 2,408 2,320 2,347 2,198 1,980 1,894 1,741 1,595 1,628 1,684 1,538 1,320 1,050 991 876 768 32.9 33.8 33 32.5 31.8 32.4 33.2 43.6 46.9 52.3 51.8 45.5 41.8 n/a n/a 7.8 Ratio (B/A) X North (A) 10k ton 3,106 2,749 2,709 2,660 2,580 2,550 2,500 2,550 2,506 2,410 2,468 2,406 2,280 2,230 2,190 2,310 South (B) 10k ton 176 173 175 182 209 208 208 252 277 289 283 283 319 330 332 382 Ratio (B/A) X 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 North (A) 10k kW 766 743 725 724 722 692 697 693 750 795 782 782 777 777 777 775 South (B) 10k kW 10,587 9,765 9,322 8,697 8,181 7,934 7,608 7,347 7,249 6,827 6,551 6,226 5,996 5,605 5,380 5,086 Ratio (B/A) X 13.8 13.1 12.9 12.0 11.3 11.5 10.9 10.6 9.7 8.6 8.4 8.0 7.7 7.2 6.9 6.6 North (A) 100 mil kWh 239 190 216 221 215 211 237 235 255 237 225 215 206 196 190 202 South (B) 100 mil kWh 5,404 5,281 5,220 5,171 5,096 4,969 4,747 4,336 4,224 4,031 3,812 3,646 3,421 3,225 3,065 2,852 Ratio (B/A) X 22.6 27.8 24.2 23.5 23.7 23.6 20.0 18.5 16.6 17.0 16.9 17.0 16.6 16.5 16.1 14.1 North (A) 10k barrel 390 385 385 424 383 386 385 380 388 383 384 383 390 421 438 424 Crude oil South (B) consumption 10k barrel Coal production Electricity generation capacity Energy sector Electricity supply Ratio (B/A) x 107,812 102,611 92,752 91,508 94,729 92,676 87,242 83,509 86,487 87,254 88,879 84,320 82,579 80,481 79,099 85,937 276.4 266.5 240.9 215.8 247.3 240.1 226.6 219.8 222.9 227.8 231.5 220.2 211.7 191.2 180.6 202.7 Note: * North Korea based on settlement, South Korea based on final budget, including supplementary budget. Converted to USD by implementing each country’s exchange rate, not suitable for direct comparison 2016 data are preliminary figures Source: BOK, Samsung Securities 174 Comparison of North and South Korea (4) Indicator 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 10k ton 482.3 451.2 480.2 480.6 467.6 n/a n/a 410.8 430.6 400.5 448.4 453.7 431.1 425.3 413.4 394.6 South (B) 10k ton 437.4 484.6 482.8 483.3 456.5 477.5 483.6 555.3 549.8 503.4 530.0 552.0 566.9 500.4 559.6 620.0 Ratio (B/A) X 0.9 1.1 1.0 1.0 1.0 n/a n/a 1.4 1.3 1.3 1.2 1.2 1.3 1.2 1.4 1.6 North (A) 10k ton 222.4 201.6 215.6 210.1 203.7 n/a n/a 191.0 185.8 152.7 189.5 202.4 179.5 172.0 173.4 168.0 South (B) 10k ton 419.7 432.7 424.1 423.0 400.6 422.4 429.5 491.6 484.3 440.8 468.0 476.8 500.0 445.1 492.7 551.5 Ratio (B/A) X 1.9 2.1 2.0 2.0 2.0 n/a n/a 2.6 2.6 2.9 2.5 2.4 2.8 2.6 2.8 3.3 North (A) 10k ton 100.9 93.1 84.2 74.9 73.7 69.1 63.0 66.3 83.0 86.1 92.3 90.9 116.9 83.5 80.5 74.6 Maritime South (B) products 10k ton 325.7 333.1 330.5 313.5 318.3 325.6 311.1 318.2 336.1 327.5 303.2 271.4 251.9 248.7 247.6 266.5 3.2 3.6 3.9 4.2 4.3 4.7 4.9 4.8 4.0 3.8 3.3 3.0 2.2 3.0 3.1 3.6 Grain* Agricultural /maritime Rice* production Iron ore Mining production Nonferrous metals North/South Unit North (A) Ratio (B/A) x North (A) 10k ton 524.9 490.6 547.1 548.6 519.0 523.2 509.3 495.5 531.6 513.0 504.1 491.3 457.9 443.3 407.8 420.8 South (B) 10k ton 44.5 44.5 69.3 66.3 59.3 54.2 51.3 45.5 36.6 29.1 22.7 21.3 22.6 17.4 15.7 2.3 Ratio (B/A) X 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 North (A) 10k ton 9.7 7.7 8.7 9.2 9.0 9.1 9.2 9.1 9.4 9.2 8.6 10.7 9.8 9.4 8.7 9.2 South (B) 10k ton 17.8 21.5 25.1 23.9 20.1 18.8 13.5 12.7 22.4 19.8 18.0 15.8 15.1 11.5 14.3 17.4 Ratio (B/A) x 1.8 2.8 2.9 2.6 2.2 2.1 1.5 1.4 2.4 2.2 2.1 1.5 1.5 1.2 1.6 1.9 Note: * Data for 2010 and 2011 not available; 2016 data are preliminary figures Source: BOK, Samsung Securities 175 Comparison of North and South Korea (5) Indicator North /South Unit North (A) 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 10k cars 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 South (B) 10k cars 422.9 455.5 452.4 451.7 456.2 465.7 427.2 351.3 382.7 408.6 384.0 369.9 346.9 317.8 314.8 294.6 Ratio (B/A) x 1,057.3 1,139.0 1,131.3 1,129.3 1,140.5 1,164.3 1,068.0 878.3 765.4 817.2 768.0 739.8 693.8 635.6 629.6 491.0 North (A) 10k tonnes 125.5 127.9 122.9 118.1 116.8 106.8 109.3 103.8 106.2 South (B) 10k tonnes Ratio (B/A) X North (A) 10k tonnes South (B) 10k tonnes Ratio (B/A) X North (A) Fertilizer South (B) Autos Steel Industrial Cement production 121.6 107.9 122.0 121.0 122.2 122.5 127.9 6,857.5 6,967.0 7,154.2 6,606.1 6,907.3 6,851.9 5,891.4 4,857.2 5,362.5 5,151.7 4,845.5 4,782.0 4,752.1 4,631.0 4,539.0 4,385.2 56.4 64.6 58.6 54.6 56.5 55.9 46.1 38.7 41.9 41.9 41.0 40.9 44.5 42.4 43.7 41.3 707.7 669.7 667.5 660.0 644.6 645.2 627.9 612.6 641.5 612.9 615.5 593.0 563.2 554.3 532.0 516.0 6,155.1 5,621.2 5,249.0 4,729.1 4,686.2 4,824.9 4,742.0 5,012.6 5,165.3 5,218.2 4,919.9 4,719.7 5,433.0 5,919.4 5,551.4 5,204.6 8.7 8.4 7.9 7.2 7.3 7.5 7.6 8.2 8.1 8.5 8.0 8.0 9.6 10.7 10.4 10.1 10k tonnes 60.4 52.8 50.2 48.5 47.6 47.1 45.9 46.6 47.9 45.4 45.4 45.0 43.4 41.6 50.3 54.6 10k tonnes 206.5 198.2 232.0 257.7 257.7 273.8 281.5 255.8 318.8 343.2 318.3 395.0 361.4 331.4 330.1 350.0 Ratio (B/A) X 3.4 3.8 4.6 5.3 5.4 5.8 6.1 5.5 6.7 7.6 7.0 8.8 8.3 8.0 6.6 6.4 North (A) 10k tonnes 2.4 2.3 2.6 2.5 2.5 2.5 3.0 3.0 3.0 3.0 2.9 2.8 2.5 2.6 2.6 2.7 Synthetic South (B) fiber 10k tonnes 165.0 134.0 136.7 145.8 147.2 147.5 146.3 134.6 133.0 144.1 145.7 165.5 197.8 224.1 230.2 234.4 68.8 58.3 52.6 58.3 58.9 59.0 48.8 44.9 44.3 48.0 50.2 59.1 79.1 86.2 88.5 86.8 Ratio (B/A) x Note: 2016 data are preliminary figures Source: BOK, Samsung Securities 176 Comparison of North and South Korea (6) Indicator North/South Unit 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 North (A) Km 5,226 5,304 5,299 5,299 5,299 5,298 5,265 5,242 5,242 5,242 5,235 5,235 5,235 5,235 5,235 5,224 Railroad South (B) length Km n/a 3,874 3,590 3,588 3,572 3,559 3,557 3,378 3,381 3,399 3,392 3,392 3,374 3,140 3,129 3,125 Ratio (B/A) x n/a 0.7 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 North (A) Km 26,176 26,183 26,164 26,118 26,114 26,110 25,950 25,854 25,798 25,579 25,544 25,495 25,185 24,879 24,449 23,963 South (B) Km 108,780 107,527 105,673 106,414 105,703 105,931 105,565 104,983 104,236 103,019 102,061 102,293 100,278 97,253 96,037 91,396 Ratio (B/A) x Road length Infrastructure North (A) Port loading and South (B) landing capacity Ratio (B/A) 10k tonnes 4.2 4.1 4.0 4.1 4.0 4.1 4.1 4.1 4.0 4.0 4.0 4.0 4.0 3.9 3.9 3.8 4,157 4,156 4,156 3,700 3,700 3,700 3,700 3,700 3,700 3,700 3,700 3,700 3,690 3,550 3,550 3,550 10k tonnes n/a 114,092 103,940 102,498 101,719 94,390 91,543 80,053 75,862 72,861 68,203 65,037 52,345 51,021 48,689 46,954 X n/a 27.5 25.0 27.7 27.5 25.5 24.7 21.6 20.5 19.7 18.4 17.6 14.2 14.4 13.7 13.2 North (A) 10k tonnes 93 100 71 73 76 76 80 84 86 80 90 90 90 88 81 85 Number South (B) of ships 10k tonnes 1,304 1,339 1,392 1,358 1,306 1,367 1,427 1,392 1,471 1,393 1,113 1,007 851 745 764 659 14.0 13.4 19.6 18.6 17.2 18.0 17.8 16.6 17.1 17.4 12.4 11.2 9.5 8.5 9.4 7.8 Ratio (B/A) x Note: 2016 data are preliminary figures Source: BOK, Samsung Securities 177 Population and size of economy GDP Population (South/North, x) (South/North, x) 50 2.14 45 2.12 40 2.10 35 GDP 30 2.08 25 2.06 20 15 2.04 Population 10 2.02 5 0 2.00 1990 1995 Source: BOK, Samsung Securities 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Source: Statistics Korea, Samsung Securities 178 Population structure North Korea: Population pyramid South Korea: Population pyramid 84 81 78 75 72 69 66 63 60 57 54 51 48 Male 45 42 39 36 33 30 27 24 21 18 15 12 9 6 3 0 600,000 400,000 200,000 Source: Statistics Korea, Samsung Securities Female (People) 0 200,000 400,000 600,000 84 81 78 75 72 69 66 63 60 57 54 51 Male 48 45 42 39 36 33 30 27 24 21 18 15 12 9 6 3 0 300,000 200,000 Female (People) 100,000 0 100,000 200,000 300,000 Source: Statistics Korea, Samsung Securities 179 National income, economic growth Economic growth GNI per capita (%) (South/North, x) 15 25 10 20 GNI per capita South Korea 15 5 10 0 North Korea (5) 5 (10) 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 Source: BOK, Samsung Securities 1990 1993 1996 1999 2002 2005 2008 2011 2014 Source: BOK, Samsung Securities 180 Trade Trade balance Total trade (USD 100m) (USD 100m) 12,000 80 (USDb) (USDm) 100 0 South Korea (LHS) 70 10,000 South Korea (LHS) 80 (200) North Korea (RHS) (400) 60 60 (600) 8,000 50 40 6,000 (800) 40 (1,000) 20 North Korea (RHS) 4,000 30 (1,200) 20 2,000 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 Source: BOK, Samsung Securities 0 (1,400) 10 (20) 0 (40) (1,600) (1,800) 1990 1995 2000 2005 2010 2015 Source: Statistics Korea, Samsung Securities 181 Industrial composition, regional trade Trade, by region Industrial composition (%) 100% 6.7 6.8 0.3 0.3 2.6 0.9 2.5 0.8 17.4 14.1 13.3 0.3 0.9 2.2 2.3 100 90% 23.5 31.1 80% 70% 90 53.9 59.2 9.1 5.1 8.8 60% 18.3 50% 40% 13.7 9.7 5.7 3.3 2.3 30% 6.3 12.6 0% 25.9 28.5 6.6 0.5 7.3 1992 3.6 0.2 2.1 2016 South Korea Agriculture, forestry and fishery Light industry Electricity, gas, and waterworks Service Source: BOK, Samsung Securities 70 21.7 1992 2016 22.3 60 80.5 50 59.3 50.8 40 2000 North Korea Mining Heavy chemical industry Construction 96.8 14.7 6.9 9.2 19.7 20% 10% 80 5.2 0.5 1.7 0.1 0.8 2016 2000 South Korea 2016 North Korea Asia North America South America Africa Oceania Other Europe Source: Statistics Korea, Samsung Securities 182 IV. Appendices IV-1 Moon Jae-in administration’s new economic roadmap initiative for Korean peninsula IV-2. Case studies—market opening in China, Vietnam, and Poland IV-3. Economic comparison of South and North Korea IV-4. North Korea’s financial system IV-5. Others North Korea’s financial system Summary ▶ Unitary banking financial system: North Korea’s key financial institutions include the North’s Central Bank (CBDPRK), Foreign Trade Bank (FTB), and bank JVs, and while the latter two function for external trade and to service foreign investors, respectively, only the former provides traditional banking services. The North’s banking system is therefore unitary, with the CBDPRK not only taking on its obvious roles (eg, currency issuance and management), but also those of a commercial bank, such as loan and deposit services for corporations and individuals. North Korea’s system allows it to easily control currency supply/circulation and execute capital in accordance with economic and fiscal plans. ▶ Central bank sole supplier of capital; credit system--limited and pre-planned utilization of capital: CBDPRK is the North’s sole capital supplier under government budget planning, with it providing all related corporate funding. This direct lending, which is mainly extended for the construction and repair of fixed assets as well as corporate liquid capital, is not subject to repayment obligations. Since it is sourced from government coffers, all proceeds from corporate activities are returned. Credit utilization is limited, with lending allowed only for corporations and lending size and period strictly controlled by the government. ▶ Two-tier currency system: Korea uses a two-tier currency system of cash and non-cash circulation, which makes it easier to control capital. Local companies are limited to a single account with CBDPRK, with all transactions among firms made in non-cash settlements. Cash transactions are confined to corporate salary payments for individuals, while consumer goods purchases are limited to individuals and corporations (the latter possible only at official markets). All of this is meant to stem capital outflows and to give the central bank total control of currency matters. ▶ Changes to financial system: North Korea suffered a vicious circle of recession during the 1990s. Worsened fiscal conditions led to a decline in government capital supplies to corporations, which in turn led to corporations’ output falling. To overcome this, North Korea revamped its financial systems to increase the capital supply of banks. It enacted the CBDPRK Act and Commercial Bank Act to separate commercial banking functions from those of the central bank, while allowing the central bank to play a supervisory role in addition to its inherent ones. These policy and systematic changes have nevertheless failed to effectively alter the North’s capital funding market, as evidenced by: 1) its return to a planned economy in 2009 via currency reforms; and 2) the CBDPRK maintaining a unitary banking system. Subsequently, North Korean corporations began looking to individuals or other firms for funding, which led to the development of a private financing market. Indeed, the North’s private portion of financing has been on the rise. 184 North Korea: Financial institutions Type Name Central bank Central Bank of the DPRK Foreign Trade Bank Foreign exchange bank Ministry Korea Kwangson Banking Corp; Amroggang Development Bank Foreign investment bank Koryo Commercial Bank; Brilliance Banking Corporation Joint venture bank Korea Joint Venture Bank; Golden Triangle Bank Rason Development Finance Co; Chinese Commercial Bank Chinese Alliance Bank; Rason Int’l Commercial Bank, Tumangang Bank North East Asia Bank Korea Changgwang Credit Bank Foreign exchange bank Party Joint venture bank Military Foreign exchange bank Korea Daesong Bank Details Central bank roles (currency issuance, money flow control) Commercial bank roles (deposits, loans) International settlement related to trades, transactions with foreign banks, supporting trading companies, managing foreign currency revenues and outlays, subject to sanctions Subject to sanctions Institutions operating only in Naseon area Belongs to Organization and Guidance Department, supervising Korea National Insurance Corporation, 2nd Guidance Bureau, 727 Guidance Bureau, Capital Construction Administration, and Chosun Gardening Company. Subject to sanctions Belongs to Central Machine-building Department and Second Economic Committee, supervising Directorate General of Foreign Economy, United Trading Company, and Ryongaksan general trading corporation. Subject to sanctions Belongs to Office 39, supervising Daesung General Bureau, Gyeongheung Guidance Bureau, Rakwon Guidance Bureau, and Daeheung Guidance Bureau. Subject to sanctions Koryo Bank Belongs to Office 38, managing hotels, foreign currency markets, and restaurants Kumgang Bank Manages Bonghwa Trading group Tanchon Commercial Bank Korea United Development Bank; First Credit Bank; International Postal Bank Daedong Credit Bank Koryo Credit Development Bank Ilsim International Bank Bank of East Land Subject to sanctions Subject to sanctions Foreign investment bank First Trust Bank 185 Unitary banking system Central Bank of DPRK fulfills obvious roles and those of a commercial bank ▶ CBDPRK the only provider of traditional banking services When excluding special banks, which function for external trade and service foreign investors Fulfills obvious roles (eg, currency issuance and management) and those of a commercial bank, such as loan and deposit services for corporations and individuals The Central Bank of the DPRK Central bank Currency issuance Money flow control Commercial bank Capital supply Corporate loans Corporate and household deposit 186 Corporate capital supply system and credit system Central bank the sole supplier of capital; credit system—limited and pre-planned utilization of capital ▶ CBDPRK provides all related corporate funding under government budget planning :1) construction of fixed assets; 2) repair of fixed assets; and 3) corporate liquid capital Direct lending is not subject to repayment obligations, but all proceeds from corporate activities are returned to the government ▶ Credit utilization is limited, with lending allowed only for corporations and lending size and period strictly controlled by government. North Korea: Capital supply system North Korea: Credit system CBDPRK Capital supply CBDPRK Capital supply Income payment Income payment Loan (conditional) Purchase machinery, equipment, and commodities Firms Payment (principal + high interest) Firms Production and construction Illegal private loans Illegal private loans Illegal private loans Firms Individuals Source: KIF Loan (prohibited) Individuals Payment (principal + high interest) Source: KIF 187 Two-tier currency system and unitary forex management Two-tier currency system of cash and non-cash circulation—a measure to make it easier to control capital ▶ Local companies are limited to a single account with CBDPRK, with all transactions among firms made in non-cash settlements Cash transactions are confined to corporate salary payments for individuals and consumer goods purchases (the latter possible only at official markets) → Meant to give the central bank total control of currency matters ▶ Using a fixed exchange rate system—eg, pegging the North Korean won to the Russian rubble over 1960-1990 and then loosely to the US dollar after dissolution of the Soviet Union North Korea: Currency system Issuance Supply KPW/USD forex rate Distribution Collection (North Korean won) 160 Purchase basic goods in public market 140 120 CBDPRK Source: KIF Firms · Employee salary · Working capital Deposit CBDPRK Pegged to USD after unpegging from Ruble 100 80 60 Purchase goods and holding cash by people 40 Cash outflow to market 20 0 1990 1994 1998 2002 2006 2010 2014 Source: KIF, BOK 188 Changes to financial system North Korea overhauls capital supply system to increase capital supply by banks ▶ To overcome the vicious circle of the 1990s recessions, North Korea overhauled its capital supply system to reduce official supplies of capital and increase that of banks On Jul 1, 2002, it unveiled “Economic Management Improvement Measures” to: 1) eliminate supplies of liquid and fixed capital to firms; 2) limit capital execution targets to key infrastructure industries—eg, defense; and 3) allow companies to fill capital shortfalls with retained earnings or loans ▶ It also enacted the CBDPRK Act and Commercial Bank Act to separate commercial banking functions from those of central bank. These policy and systematic changes have nevertheless failed to effectively alter the North’s capital funding market, as evidenced by the central bank maintaining a unitary banking system. North Korea: Changes to financing system Type Until the mid-1990s Excess demand on capital Bank loans, funds for working capital North Korea: Separation of commercial bank from CBDPRK Mid 90s-2001 Post-2002 Central bank Excess capital or bank loans Working capital Excess capital or bank loans Commercial bank Separate Central bank function • Currency issuance • Currency control Government budget control • Receipt and payment • Management of firms’ fixed assets Financial supervisory function • Approval of financial Establish institution creation • Supervisory and control over finance Commercial bank function • Deposits and loans for corporates Maintenance expenses for fixed assets Reconstruction Construction expenses for fixed assets Expansion New construction Source: KIEP National budget National budget National budget Source: KIF 189 Development of private financing market Private financing market growing due to lending shortage by banks ▶ Lending shortages by banks financing market corporations looking to individuals or other firms for funding → development of private Led by so-called “money masters” or donju, consisting of traders, overseas Chinese, Korean-Japanese, and smugglers ▶ Private portion of financing on the rise due to sustained lending shortages by banks and government’s implicit tolerance of donju The donju have established financial institutions, which are similar to banks and have traits of modern financial systems (eg, applying different interest rates to borrowers depending on social or employment status and offering regional capital remittance services) Demand Merchant, self-employed, SMEs, individuals Brokerage Supply Professional brokers/money exchanger, authorities/families of authorities Government-related families, foreign trade/overseas workers 190 IV. Appendices IV-1 Moon Jae-in administration’s new economic roadmap initiative for Korean peninsula IV-2. Case studies—market opening in China, Vietnam, and Poland IV-3. Economic comparison of South and North Korea IV-4. North Korea’s financial system IV-5. Others Gaesong Industrial Complex plays ▶ Recent share price reactions overblown; stock picking should be based on development of negotiations ▶ Related stocks in table below were picked by domestic media and are not our recommendations Name Code Exchange Sector Market cap (KRWb) Note Tae Kwang A003240 Kospi Materials 1,476 Previous complex occupant; synthetic fibers Cuckoo Holdings A192400 Kospi Consumer Discretionary 1,145 Previous complex occupant; electric rice cookers Jahwa Electronics A033240 Kospi Information Technology 286 Previous complex occupant; electronic components Shin Won A009270 Kospi Consumer Discretionary 246 Previous complex occupant; apparel OEM Nam Kwang E&C A001260 Kospi Industrials 230 Helped construct complex Bosung Power Technology A006910 Kosdaq Industrials 194 Previous complex occupant; equipment for electric power industry Good People A033340 Kosdaq Consumer Discretionary 184 Previous complex occupant; apparel and undergarments In the F A014990 Kospi Consumer Discretionary 162 Previous complex occupant; women's and men's apparel J.Estina A026040 Kosdaq Consumer Discretionary 158 Invested in cooperative factory in Gaeseong Industrial Complex; jewelry and acce ssories Pan-Pacific Trading A007980 Kospi Consumer Discretionary 155 Previous complex occupant; apparel OEM Inzi Controls A023800 Kospi Consumer Discretionary 114 Previous complex occupant; automotive parts Jaeyoung Solutec A049630 Kosdaq Information Technology 110 Previous complex occupant; handsets and optic components Note: Sorted by market cap Source: Local media 192 Power transmission and fertilizer plays ▶ Recent share price reactions overblown; stock picking should be based on development of negotiations ▶ Related stocks in table below were picked by domestic media and are not our recommendations Name Code Kepco Exchange Sector Market cap (KRWb) Note A015760 Kospi Utilities 21,859 LS Industrial Systems A010120 Kospi Industrials 2,274 Electric power devices and systems Kepco P&E A051600 Kospi Utilities 1,802 Maintenance of electricity generating devices Taihan Electric Wire A001440 Kospi Industrials 1,358 Supplies ultra-high voltage lines for infrastructure construction Kepco E&C A052690 Kospi Utilities 1,135 Plant-related engineering Ehwa Technologies Information A024810 Kosdaq Industrials 212 Power supplies and transformers Cheryong Electric A033100 Kosdaq Industrials 198 Transformers Semyung Electric Machinery A017510 Kosdaq Industrials 184 Delivers to Kepco, makes arms and brackets for subways and electrical grid Kwang Myung Electric A017040 Kospi Industrials 178 Electrical panels, solar power generation systems Cheryong Industrial A147830 Kosdaq Industrials 125 Underground cable cases for Kepco Seondo Electric A007610 Kospi Industrials 122 Makes electricity transmission and transformation devices for industrial plants Seojeon Electric Machinery A189860 Kosdaq Industrials 45 Namhae Chemical A025860 Kospi Materials 879 Composite fertilizers Easy Bio A035810 Kosdaq Consumer Staples 521 Agriculture and stockbreeding; fertilizers and feed additives KG Chemical A001390 Kospi Materials 383 Eco-friendly micro-organisms; fertilizers that prevent eelworm Carpro A006380 Kospi Materials 299 Ammonium sulfate fertilizer Nong Woo Bio A054050 Kosdaq Health Care 295 Breeds and develops seeds Kyung Nong A002100 Kospi Materials 195 Pesticides FarmStory A027710 Kosdaq Consumer Staples 134 Distributes assorted hog feed Cho Bi A001550 Kospi Materials 112 Assorted feed Hyosung ONB A097870 Kosdaq Materials 112 Organic fertilizer Engages in North Korea-related projects Makes electric panels for high and low voltage and automotive-control systems Note: Sorted by market cap Source: Local media 193 Inter-Korean railroad and gas pipeline plays ▶ Recent share price reactions overblown; stock picking should be based on development of negotiations ▶ Related stocks in table below were picked by domestic media and are not our recommendations Name Code Exchange Sector Market cap (KRWb) Hyundai Rotem A064350 Kospi Industrials Daea TI A045390 Kosdaq Information Technology 662 Railway traffic control system and intelligent traffic system Daeho AL A069460 Kospi Materials 193 1st vendor for Hyundai Rotem Hyundai Information Technology A026180 Kosdaq Information Technology 149 Specialized in SOC system such as integrated railway information systems Puloon Technology A094940 Kosdaq Information Technology 132 Station automation; exports to China Tuksu Construction A026150 Kosdaq Industrials 121 Railway, belowground roadways, subway Leenos A039980 Kosdaq Consumer Discretionary 114 Railroad wireless communication ChoongAng Ocean A054180 Kosdaq Industrials 113 Merged OEM motor maker for railroad cars Woowon Development A046940 Kosdaq Industrials 96 Dong Yang Steel Pipe A008970 Kospi Materials 303 Steel pipes Daewon Cable A006340 Kospi Industrials 185 Wire and optic fiber cable; certificate needed for Russia natural gas project Dae Dong Steel A048470 Kosdaq Materials 138 HRC, steel plate, atmosphere corrosion resistant steel, other special steel Hi Steel A071090 Kospi Materials 99 Piping structural tubes HS Valve A039610 Kosdaq Industrials 97 LPG valves, exports to Russia and the US DK-Lok A105740 Kosdaq Industrials 93 Makes and exports valve-related products Jokwang I.L.I A044060 Kosdaq Industrials 64 Special automatic valves for industrial use 3,111 Note Specialized in railways Railways and subways Note: Sorted by market cap Source: Local media 194 Mount Geumgang and DMZ development-related plays ▶ Recent share price reactions overblown; stock picking should be based on development of negotiations ▶ Related stocks in table below were picked by domestic media and are not our recommendations Exchange Sector Market cap (KRWb) Name Code Note Hyundai E&C A000720 Kospi Industrials 7,483 Spearheaded Mount Kumgang tours Hyundai Elevator A017800 Kospi Industrials 3,164 Owns part of Hyundai Merchant Marine, Largest shareholder of Hyundai Hyundai Merchant Marine A011200 Kospi Industrials 1,765 Had cruise tour business for Mount Kumgang Ananti A025980 Kosdaq Consumer Discretionary 836 Owns resort in Mount Kumgang tourism zone Daemyung Corporation A007720 Kosdaq Consumer Discretionary 348 Operates golf course and resort in Goseong, Gangwon province Firstec A010820 Kospi Industrials 311 Co-developed surveillance robot with Hanwha Techwin Yujin Robot A056080 Kosdaq Consumer Discretionary 204 Robot specialist, including military use in mine detection and removal in DMZ E-World A084680 Kospi Consumer Discretionary 171 Owns hotel and resort in Goseong, Gangwon Province Il Sung Construction A013360 Kospi Industrials 114 Related to Pyeonghwa Motor, which has ties with North Korea Nature and Environment A043910 Kosdaq Industrials 95 Environmental business for waterway control and eco-friendly seawalls Mohenz A006920 Kosdaq Industrials 74 Subsidiary Duckwon Industrial operates ready-mixed concrete business in Gangwon Province Note: Sorted by market cap Source: Local media 195 Inter-Korean economic cooperation over 1971-2003 Date Event Date Event 1971. 8 Korean Red Cross president proposes inter-Korean Red Cross talks 1995. 6 South Korea supplies 150,000 ton of rice in food aid to North Korea 1971. 9 Preliminary sessions held 25 times until Aug 1972 1996. 9 Seoul’s assistance to and investment in North is suspended following North Korean submarine infiltration 1972. 8 Inter-Korean Red Cross talks held seven times through Jul 1973 1998. 4 1972. 11 Inter-Korean Commission meets three times through Jun 1973 1998. 6 1984. 9 North provides flood relief aid to South 1984. 11 Inter-Korean economic talks held five times through Nov 1985 1988. 7 President Roh Taewoo announces Jul 7 Declaration for National SelfEsteem, Unification and Prosperity 1988. 10 Measures to Open the Economy toward North Korea 1989. 1 Hyundai founder Chung Ju Young visits North Korea first time and signs Agreement on Mount Kumgang Tourism 1989. 3 Inter-Korean Exchange and Cooperation Promotion Council introduced 1989. 6 Basic Guidelines on Inter-Korean Exchange and Cooperation* 1990. 8 Inter-Korean Exchange and Cooperation Act and Inter-Korean Cooperation Fund Act 1991. 12 Signs Inter-Korean Basic Agreement 1992. 2 Inter-Korean processing-on-commission trade begins 1992. 9 1994. 11 1998. 10 Announce measures for Inter-Korean Economic Cooperation Promotion (2nd) Chung Ju Young drives cattle herd to the North for the first time and derives agreement on inter-Korean economic cooperation ( including Mount Kumgang tour) Chung Ju Young drives cattle to North for second time and meets with Kim Jong Il 1998. 11 First cruise ship makes trip from the South to Mount Kumgang 1999. 2 Hyundai Group founds Hyundai Asan, which is dedicated to interKorean economic cooperation projects 1999. 6 South provides fertilizer to the North 2000. 6 First inter-Korean summit (Jun 15 joint peace declaration) 2000. 10 Seoul provides first food loans to Pyongyang 2000. 8 Hyundai and North Korean Asian-Pacific Peace Committee agree to develop Gaeseong Industrial Complex (66.12m sqm) 2002. 9 Construction of inter-Korean railway (Gyeongui and Donghae lines) and roads 2002. 11 North Korea introduces Gaeseong Industrial Complex Act 2003. 2 Adopts annexed agreement for Inter-Korean Exchange and Cooperation Temporary road on Donghae line opens and Mount Kumgang pilot tour via inland route 2003. 6 First construction stage of GIC Announces Measures for Inter-Korean Economic Cooperation Promotion (1st) 2003. 8 Adopts four major agreements on inter-Korean economic cooperation* Note: * Officially known as “Inter-Korean Basic Agreement on Reconciliation, Non-aggression and Exchange and Cooperation between the South and North” Note: * investment protection, prevention of double taxation of income, procedures for resolution of commercial disputes between South and North, and clearing settlement 196 Chronology of Inter-Korean economic cooperation (2004-2016) Date Event Date Event 2004. 1 Adopts agreement on entering and staying in GIC and Mount Kumgang tourism area 2011. 4 Pyeongyang cancels Hyundai Asan’s license to exclusively operate Mount Kumgang tourism business 2004. 6 Launches GIC 2012. 1-12 Affected companies receive loans from inter-Korean Cooperation Fund and emergency aid 2004. 12 Manufactures first product from GIC 2012. 1 North Korean workers at GIC exceed 50,000 2005. 12 Annual Inter-Korean trade exceeds USD1b 2012. 9 North declines Korean Red Cross’s flood aid proposal 2006. 11 North Korean workers at GIC top 10,000 2013. 1 Cumulative production at GIC reaches USD2b 2007. 1 Cumulative production at GIC reaches USD100m 2013. 4 GIC suspended; North Korean workers removed 2007. 5 Inter-Korean trains operate on a pilot basis 2013. 9 GIC reopens; inter-Korean joint committee opens office 2007. 10 Inter-Korean summit produces declaration on advancement of South-North relations, peace, and prosperity 2014. 2 First due diligence for Najin-Hasan collaborative logistics project between North Korea and Russia 2008. 7 South Korean tourist shots dead by North soldier; Mount Kumgang tourism is halted 2014. 7 Second due diligence for Najin-Hasan project 2008. 11 Cumulative production at GIC exceeds USD500m 2014. 11 First pilot operation for Najin-Hasan project 2008. 12 North Korea suspends inter-Korean passage on inland routes 2015. 4 Second pilot operation for Najin-Hasan project 2009. 8 North Korea lifts inland route suspension 2015. 8 Seoul-Wonsan railway line restoration launched 2010. 5 Inter-Korean trade and exchange is suspended on May 24 after Cheonan attack 2015. 6 Gaeseong Manwoldae joint excavation investigation 2010. 8 Inter-Korean economic cooperation-related companies receive loans from Inter-Korean Cooperation Fund 2015. 10 Special exhibitions in Seoul and Gaeseong for ruins of Manwoldae Palace 2010. 10 Seoul provides aid to flood-stricken North 2015. 11 Third pilot operation for Najin-Hasan project 2010. 11 Flood aid suspended following bombardment of Yeonpyeong 2016. 2 Seoul suspends GIC operations following military threats from Pyeongyang; North announces GIC is militarily restricted area 197 Chronology of Gaeseong Industrial Complex Date Event Date Event 2000. 8 Hyundai Asan and Pyongyang reach agreement on development of industrial park 2010. 9 Cumulative production value reaches USD1b 2002. 8 Inter-Korean Exchange and Cooperation Promotion Council agrees on construction of industrial park in Gaeseong 2011. 12 Cumulative production value hits USD1.5b 2002. 11 Pyongyang enacts Gaeseong Industrial Zone Act 2012. 10 Pyongyang imposes USD0.16b tax on eight firms operating in GIC 2003. 6 First phase of GIC breaks ground 2013. 3 Pyongyang threatens to shut down GIC if not taken seriously 2004. 4 Ministry of Unification approves first phase of project (3.3 square kilometers) 2013. 4 North Korean official announces withdrawal of all of its workers from GIC 2004. 6 15 companies sign up to enter GIC on pilot basis 2013. 5 South Korean workers return from GIC 2004. 12 GIC produces first products 2013. 6 Plans to hold senior-level talks fall apart 2005. 9 24 companies selected and sign up for first phase (initial round) 2013. 7 Inter-Korean working-level talks held (need to normalize GIC shared) 2007. 5 Seoul enacts Gaeseong Industrial Zone Support Act 2013. 8 Seventh working-level talk reaches agreement on five items 2007. 6 183 companies selected and sign up for first phase (2nd round) 2013. 9 GIC reopens 2008. 11 Cumulative production value hits USD500m 2014. 4 German Chamber of Commerce member visits 2009. 5 Pyongyang declares cancellation of GIC-related laws and contracts 2014. 5 World Overseas Korean Traders Association and World Korean Business Convention staff visit 2009. 6 Inter-Korean working-level talks on GIC (1st and 2nd) 2014. 6 German needle manufacturer Groz-Beckert opens office in Gaeseong in a first for a foreign firm 2009. 7 Inter-Korean working-level talk on GIC (3rd) 2014. 8 Uniforms for 7,000 staff working during the Pope’s South Korea trip made in Gaeseong 2010. 5 All inter-Korean trades and exchanges suspended on May 24 (except GIC) after Cheonan attack 2014. 10 Joint apparel brand Sisbro sold out in its first home shopping foray 2010. 7 Wages paid to North Korean workers hits USD100m 2016. 2 Seoul suspends GIC operations after military threats from Pyeongyang, with the North declaring the GIC is a militarily restricted area 198 10th Fl., Samsung Electronics Bldg., 11, 74-gil, Seochodae-ro, Seocho-gu, Seoul, Korea 06620 Tel: 822 2020 8000 Fax: 822 2020 7804 For more information, please call our sales representatives: LONDON SHANGHAI Samsung Securities Europe Limited 21F Tower 42, 25 Old Broad Street, London EC2N 1HQ Tel. 44-207-786-7879 Fax. 44-207-786-7818 Samsung Securities Shanghai Representative Office #2601, Shanghai International Trading Center No 2201, Yan An West Road, Shanghai, China Tel: 86-21-6270-4168(372) NEW YORK TOKYO Samsung Securities America Limited 1330 Avenue of the Americas 26th Floor, New York, NY 10019 Tel: 1-212-972-2220 Fax: 1-212-972-3900 Samsung Securities Tokyo Representative Office #106-8532 Tokyo, Japan Minato-ku Roppongi, Roppongi T-cube 3-1-1, 19F Tel: 81-3-6234-2792 HONG KONG Samsung Securities Asia Limited 26/F, Three Exchange Square, 8 Connaught Place, Central, Hong Kong Tel: 852-3411-3888 (general) Fax: 852-2528-3396