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UNCLAS SECTION 01 OF 04 SEOUL 000058 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KN
SUBJECT: NORTH KOREA ECONOMIC BRIEFING - DECEMBER 2008 
 
Inter-Korean Economic Cooperation 
--------------------------------- 
- Inter-Korean Exchange Fund Allocation to Increase in 2009, 
although National Assembly Slashes ROKG Share 
- Gyeonggi Province Reduces Its 2009 Inter-Korean Cooperation 
Budget 
- ROKG Provides USD 5.4 Million of Loans for Hyundai Asan 
Contractors 
- ROKG to Build KIC Nursery in Early 2009 
- KIC Firms Request Compensation for USD 100 Million in Recent 
Losses 
 
Domestic Economy 
---------------- 
- U.S. Scholar Expects DPRK Economy to Get Worse in 2009 
- UN: DPRK Grain Harvest Increases 17 Percent; 850kmt of Food Aid 
Still Needed in 2009 
 
Foreign Aid 
----------- 
- Sixth Shipment of U.S. Food Aid to Arrive in DPRK 
- USG Spent USD 4 Million for DPRK Medical Aid in 2008 
- ROK NGO Sends Food Aid to DPRK 
 
Foreign Trade and Investment 
---------------------------- 
- DPRK Ranks Eleventh in Arms Sales to Developing Nations (2000-07) 
- DPRK Raises Tariff on Imported Cars to 100 Percent 
- DPRK to Ban Imports of Used Chinese Cars from 2009 
- German-DPRK Trade Continues to Drop 
- Chinese Tour Agency Expands DPRK Tour for Foreigners in 2009 
- DPRK May Oust Inactive Firms from Rajin-Sunbong Economic Zone 
- North Korea Launches 3G Mobile Service in USD 400 Million Deal 
with Orascom 
- Dutch Trade Delegation Visits DPRK 
- DPRK May Take Part in Russian Preparations for 2012 Vladivostok 
APEC Summit 
- DPRK Insurance Firm Wins USD 57 Million Lawsuit in UK 
 
 
Inter-Korean Economic Cooperation 
--------------------------------- 
 
¶1. (U) Inter-Korean Exchange Fund Allocation to Increase in 2009, 
although National Assembly Slashes ROKG Share:  The Ministry of 
Unification (MOU) said December 14 that it will set aside about 1.5 
trillion won (USD 1.1 billion) in 2009 to facilitate economic and 
humanitarian exchanges with North Korea, including 400,000 metric 
tons of rice aid.  The amount represents an 8.6 percent increase 
from the 1.39 trillion won earmarked for the public/private 
inter-Korean cooperation fund (IKCF) in 2008 (but a decrease in 
dollar terms due to the weakening of the won in late 2008).  MOU 
said that the National Assembly, however, cut the amount of the 
government's contribution to the fund to 350 billion won (USD 255 
million) from the 650 billion won (USD 473.5 million) originally 
proposed by the MOU.  Note: IKCF is comprised of government funds 
and private sector contributions and can draw on reserves to meet a 
possible budget shortfall in 2009.  In 2008, we estimate that only 
20 percent of the IKCF budget was spent because of the ongoing 
freeze in inter-Korean relations. 
 
¶2. (U) Gyeonggi Province Reduces Its 2009 Inter-Korean Cooperation 
Budget:  South Korea's Gyeonggi Provincial government said December 
25 that it reduced its cooperation budget with North Korea from 6 
billion won (USD 5.4 million) in 2008 to 4.3 billion won (USD 3.3 
million) in 2009.  Due to the stalled inter-Korean ties in 2008, the 
provincial government spent only 30 percent of the planned 
inter-Korean cooperation project budget.  Planned 2009 projects for 
North Korea include seedlings, malaria preventive measures and rice 
paddy modernization.  Note:  Provincial government programs are not 
part of the IKCF. 
 
¶3. (U) ROKG Provides USD 5.4 Million of Loans for Hyundai Asan 
Contractors:  MOU said December 26 that it has decided to provide 7 
billion won (USD 5.44 million) of loans from the Inter-Korean 
Cooperation Fund for contractors of Hyundai Asan Corporation who 
have been involved in Mount Geumgang tour project.  The contractors 
have been facing financial difficulties since the Mount Geumgang 
tour was suspended in July 2008.  The loans will mature in a year 
with a concessional 2 percent interest rate. 
 
SEOUL 00000058  002 OF 004 
 
 
 
¶4. (U) ROKG to Build KIC Nursery in Early 2009:  The administrative 
body for KIC, the Kaesong District Management Committee (KIDMAC), 
said December 29 that the ROKG has decided to spend 900 million won 
(USD 690,000) to build a nursery for infants of workers at the 
Kaesong Industrial Complex (KIC) in 2009.  The facility is intended 
to accommodate 200 infants. 
 
¶5. (U) KIC Firms Request Compensation for USD 100 Million in Recent 
Losses:  Yonhap News Agency reported in December that South Korean 
firms operating at the KIC have recently asked the South Korean 
government to compensate them for their recent losses.  The 88 KIC 
firms currently operating at the KIC face financial losses after 
North Korea decided to halve the number of South Koreans stationed 
at the KIC.  According to the association of the KIC firms, they 
have lost 110 billion won (USD 100 million) in losses for the past 
three months due to the stalled inter-Korean ties.  However, the 
South Korean government does not seem to be considering the KIC 
firms' demand.   In a related development, opposition lawmaker Chun 
Jung-bae claimed on December 16 that seven South Korean companies 
that have leased factory sites in the KIC have started to cancel 
plans to build factories as concerns mount about deteriorating 
inter-Korean ties since October 2008. 
 
 
Domestic Economy 
---------------- 
 
¶6. (U) U.S. Scholar Expects DPRK Economy to Get Worse in 2009: 
Radio Free Asia (RFA) quoted John Park, senior research associate of 
the United States Institute of Peace, on December 2 as saying that 
the North Korean economy in 2009 is expected to deteriorate further. 
 Park cited the following factors: falling prices of raw materials 
(North Korea's major exports are coal, zinc, iron ore and nickel); 
weak infrastructure in North Korea (firms from Singapore, Egypt, 
China and the EU have recently invested in North Korea on a small 
scale, but have faced difficulties due to poor infrastructure in the 
North); and, North Korea's closed economic policy. 
 
¶7. (U) UN: DPRK Grain Harvest Increases 17 Percent; but 850kmt of 
Food Aid Still Needed in 2009:  RFA reported on December 8 that 
World Food Program (WFP) and Food and Agriculture Organization (FAO) 
officials said that North Korea's grain production in harvest year 
2008 totaled 4.21 million metric tons (mt) (unmilled or 3.3 million 
mt milled), an increase of 17 percent from the previous harvest. 
Food shortages in 2009 are expected to be smaller than in 2008, when 
WFP estimated a shortage of 1.66 million mt.  WFP estimates that 
North Korea will still require at least an additional 850,000 mt of 
food in 2009 to feed the population.  South Korea's Rural 
Development Administration on December 18 provided a far more 
favorable assessment of North Korea's fall 2008 grain harvest -- 
4.31 million mt (milled). 
 
 
Foreign Aid 
----------- 
 
¶8. (U) Sixth Shipment of U.S. Food Aid in DPRK:  South Korean media 
reported on December 24 that the State Department said the U.S. 
Government had recently shipped the sixth batch of food aid to North 
Korea and that it would arrive in North Korea on January 8, 2009. 
The 21,000 metric tons of corn will be delivered to 25 counties in 
Jagang and Pyongan Provinces in North Korea.   The next shipment 
consisting of 4,940 tons of corn-soya blend and oil is scheduled to 
arrive in North Korea on January 19, 2009.  The U.S. Government has 
so far provided a total of 144,330 metric tons of food aid to North 
Korea out of the pledged 500,000 metric tons.  Note: Radio Free Asia 
confirmed arrival in early January. 
 
¶9. (U) USG Spent USD 4 Million for DPRK Medical Aid in 2008:  Radio 
Free Asia reported December 20 that the U.S. Government had spent 
USD 4 million in 2008 via its NGOs to help North Korea improve its 
medical sector.  The amount was 40 times higher than that of 2007. 
 
 
¶10. (U) ROK NGO Sends Food Aid to DPRK:  Jungto Society (JTS), a 
South Korean NGO helping North Korea, said December 30 that it 
shipped 380 million won (USD 302,307) worth of baby formula to North 
Korea.  The 25 tons of seaweed gruel powder, 50 tons of wheat flour, 
28 tons of baby formula, 20 tons of sugar and one ton of salt will 
 
SEOUL 00000058  003 OF 004 
 
 
be provided to 6,300 infants and 2,500 mothers in Hoeryeong, North 
Hamgyeong Province, North Korea.  Earlier in 2008, JTS provided 150 
million won (USD 119,331) worth of medical devices to the North 
Hamgyeong Provincial People's Hospital in North Korea. 
 
 
Foreign Trade and Investment 
---------------------------- 
 
¶11. (U) DPRK Ranks Eleventh in Arms Sales to Developing Nations 
(2000-07):  Radio Free Asia on December 8 quoted a Congressional 
Research Service report that North Korea ranked eleventh in arms 
sales to developing nations from 2000 to 2007 with total sales of 
USD 1 billion.  No further details of the arms deliveries were 
reported. 
 
¶12. (U) DPRK Raises Tariff on Imported Cars to 100 Percent: 
Japanese Mainichi Newspaper reported on December 22 that North Korea 
had increased duties on imported cars from 30 to 100 percent 
beginning from October 1, 2008.  The newspaper reported that 
production in the North's auto plants is just 10 percent of 
capacity, mainly due to energy shortages.  North Korean annual 
vehicle production amounts to under 5,000 cars.  A North Korea 
expert said that the increase of import duties is to protect 
domestic automakers such as Pyeonghwa Motors.  Note: Pyeonghwa 
Motors was established in 2004 through an investment deal involving 
a South Korean Unification Church group.  The joint venture 
automaker currently produces just a few hundred cars a year at its 
plant in Nampo. 
 
¶13. (U) DPRK to Ban Imports of Used Chinese Cars from 2009:  Radio 
Free Asia reported on November 27 that a Chinese source said that 
North Korea recently banned imports of used Chinese vehicles into 
North Korea from 2009 in a bid to protect its domestic market. 
Hwacheon Motors, a China-based auto dealer in a contract with 
Pyeonghwa Motors, is reportedly exempt from the ban.  Although 
imports of used Japanese cars to North Korea were banned in January 
2007, trading of second-hand Chinese cars was tolerated heretofore. 
 
¶14. (U) German-DPRK Trade Continues to Drop:  Korea Trade and 
Investment Promotion Agency (KOTRA) reported Germany's Federal 
Statistical Office December 26 as saying that North Korea's 
bilateral trade with Germany has continuously declined since 2002. 
The decline in trade with Germany is mainly attributable to North 
Korea's unstable political situation, past defaults on foreign debts 
and nuclear weapons development.  North Korea's trade with Germany 
in 2007 plunged 40 percent from 2006 to a total of USD 48 million, 
while January-September 2008 trade amounted to only USD 36 million. 
 North Korea's major exports to Germany include garments, metal and 
minerals while its major imports from Germany consist of chemical, 
machinery and medical devices. 
 
DPRK-Germany Trade 
------------------ 
Unit: USD Million) 
 
YEAR    DPRK Exports   DPRK Imports   TOTAL    CHANGE 
2006        64             17          81       (25) 
2007        33             15          48       (40) 
2008        27              9          36        N/A 
 
   Source: Federal Statistical Office of Germany 
 
¶15. (U) Chinese Tour Agency Expands DPRK Tour for Foreigners in 
2009:  Radio Free Asia on December 18 quoted China-based Koryo Tour 
Agency as saying that the North Korean authority will soon open up 
Chilbo Mountain, beaches in Chungjin and Haejoo, and limited areas 
in Pyongyang, North Korea for foreign tourists in February 2009. 
The Koryo Tour Agency said, "In 2009, we intend to go to even more 
places than ever before, some wholly new areas and some expanded 
attractions in more familiar places."  The tour agency said that 
more than 1,000 Chinese and foreign tourists (including Americans) 
visited North Korea in 2008 and the number of foreign tourists to 
North Korea would continue to grow. 
 
¶16. (U) DPRK May Oust Inactive Firms from Rajin-Sunbong Economic 
Zone:  Kim Ho-nyoun, MOU spokesman, reported December 16 that North 
Korean authorities are planning to remove inoperative foreign 
companies from Rajin-Sunbong special economic zone in northeastern 
North Korea.  Kim said, "North Korea appears to have conducted a 
 
SEOUL 00000058  004 OF 004 
 
 
survey in October 2008 to cull companies that exist only on paper 
from the Rajin-Sunbong economic zone." 
 
¶17. (U) North Korea Launches 3G Mobile Service in USD 400 Million 
Deal with Orascom:  North Korea's Central News Agency (KCNA) 
reported December 15 that Orascom Telecom Holding (OTH), an 
Egypt-based telecommunication service provider, launched 3G mobile 
service in Pyongyang, North Korea.  Ro Tu-chol, vice premier of the 
North Korean cabinet, Ryu Yong-sop, Minister of Post and 
Telecommunication, and Naguib Sawiris, Chairman and CEO of  OTH and 
Ismail Abdelrahman Ghoneim Hussein, Egyptian Ambassador to Pyongyang 
were present for the launching ceremony on December 15 in Pyongyang, 
North Korea.  North Korea began mobile service in November 2002, but 
the service was banned shortly after the Ryongchun train explosion 
in April 2002.   The new mobile service is reportedly voice 
communication only and the service will be limited initially to 
Pyongyang.  OTH reportedly invested USD 200 million in network 
infrastructure and plans to invest an additional USD 200 million in 
the next two years.  OTH owns a 75 percent stake while the North's 
state-owned Korea Post and Telecommunications Corporation holds a 25 
percent stake. 
 
¶18. (U) Dutch Trade Delegation Visits DPRK: KOTRA on December 17 
reported that the Internet homepage of GPI Consultancy, a 
Netherlands-based consulting firm, claimed that GPI led a trade 
mission consisting of the Netherlands Council for Trade Promotion 
and Amsterdam Chamber of Commerce to North Korea on September 
30-October 4 to seek business opportunities.  The trade mission 
members' business areas include agriculture, light industry and 
computer software. 
 
¶19. (U) DPRK May Take Part in Russian Preparations for 2012 
Vladivostok APEC Summit:  KOTRA on December 17 announced that 
Primedia, a Russian newspaper, reported that North Korea and 
Primorsky Territory, Far Eastern Russia, had an economic 
working-level meeting on November 28 in Primorsky and signed a 
protocol.  Igor Oleisky, Vice Governor of the Primorsky Krai 
Regional Administration and Ri Myong-san, Vice Minister of North 
Korea's Foreign Ministry signed the protocol.  Under the protocol, 
North Korea agreed to take part in the preparation of the 2012 
Vladivostok APEC Summit.  North Korea plans to take part in building 
roads, sea bridges, an international convention center, a power 
plant, a power distribution center, sewage facilities, hotels and a 
press center, and the modernization of Vladivostok airport.  The two 
sides also agreed to cooperate in shipbuilding, ship repair, the 
fisheries industry, trade, banking services and the medical sector. 
 
 
¶20. (U) DPRK Insurance Firm Wins USD 57 Million Lawsuit in UK:  The 
(North) Korea National Insurance Corporation (KNIC), a state-run 
firm in Pyongyang, North Korea, recently won a court case against a 
group of international insurance firms led by a subsidiary of German 
insurance giant Allianz Group for more than 44 million Euros (USD 57 
million).  The litigation began in Britain's High Court in January 
¶2007.  The lawsuit charged that the insurers refused to pay 
reinsurance claims on a helicopter belonging to North Korea's Air 
Koryo which crashed in 2005 and destroyed a warehouse near 
Pyongyang, North Korea.  The reinsurers argued unsuccessfully that 
the underlying insurance claim was a fraudulent method for North 
Korea to bring in cash. 
 
STEPHENS