VZCZCXRO6068
RR RUEHVK
DE RUEHUL #0315/01 0602235
ZNR UUUUU ZZH
R 012235Z MAR 09
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC 3424
RUCPDOC/USDOC WASHDC 8181
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEAUSA/DEPT OF HHS WASHDC
RHEHNSC/NSC WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 5401
RUEHBJ/AMEMBASSY BEIJING 5292
RUEHGP/AMEMBASSY SINGAPORE 6207
RUEHHK/AMCONSUL HONG KONG 3810
RUEHSH/AMCONSUL SHENYANG 3943
RUEHVK/AMCONSUL VLADIVOSTOK 1598
RUEHIN/AIT TAIPEI 2948

UNCLAS SECTION 01 OF 04 SEOUL 000315 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG ETRD KN
SUBJECT: NORTH KOREA ECONOMIC BRIEFING - FEBRUARY 2009 
 
------------- 
In This Issue 
------------- 
 
Inter-Korean Economic Cooperation 
--------------------------------- 
- Slow Growth in Inter-Korean Trade Masks Big Changes in 
Composition 
- Pyongyang Hemp to Start Operation in March Pending Wage Agreement 
 
Domestic Economy 
---------------- 
- DPRK Re-establishing Economic Development Planning Process 
- DPRK Cracks Down on Markets to Stem Imports 
- DPRK Upgrading Thermal Power Plants to Increase Electricity 
Output 
- Foreign Exchange Rates Fluctuate in DPRK 
 
Foreign Aid 
----------- 
- WFP Cites Lack of Resources in Partial Suspension of DPRK Food 
Distribution 
- DPRK Strengthens Avian Influenza Prevention in Cooperation with 
International Organizations 
- Methodist Groups Send Food and Other Aid to North Korea 
- UNICEF Provides New Vaccine Storage Equipment to DPRK 
- ROK Provincial Government to Build Pig Farm in DPRK 
 
Foreign Trade and Investment 
---------------------------- 
- DPRK Restricts International Communication for Trading Companies 
- DPRK Sets Up Consular Office in Dandong to Expand Trade with 
China 
- DPRK Diplomats in Nepal Purchase Excessive Oil and Gas Duty Free 
- DPRK Considers Setting Up Free Trade Zone on Wihwa Islet near 
Chinese Border 
 
 
Inter-Korean Economic Cooperation 
--------------------------------- 
 
¶1. (U) Slow Growth in Inter-Korean Trade Masks Big Changes in 
Composition:  The Ministry of Unification (MOU) announced that 
inter-Korean trade in 2008 grew just 1.2 percent to USD 1.82 billion 
(following growth rates of 27.8 percent in 2006 and 33.2 percent in 
2007).  South Korea's exports to the DPRK fell by 14 percent to USD 
888 million, while imports rose 22 percent to USD 932 million.  The 
MOU attributes the slow growth to the appreciation of the U.S. 
dollar (implicitly pointing to North Korea's hard currency 
shortage).  A closer look at the figures (see table) shows that some 
categories of trade grew sharply while others fell dramatically. 
Trade involving the Kaesong Industrial Complex (KIC) rose by 84 
percent and now comprises 44 percent of total inter-Korean trade. 
This tracks with the significant increase in the number of factories 
in KIC in 2007 and early 2008.  Processing-on-commission (POC) trade 
between the two Koreas rose 24 percent to USD 408 million, 
accounting for 22 percent of the total inter-Korean trade.  On the 
other hand, the political chill between the two Koreas nearly 
eliminated ROKG humanitarian aid, and reduced ROK NGO transactions 
by 73 percent (partly through reduced ROKG funding).  Also, revenues 
from the Mt. Kumgang tourism project declined by 45 percent because 
operations there were suspended in July after the shooting of a ROK 
tourist who strayed off the compound.  South Korea's major imports 
from North Korea include textiles, minerals, and agricultural and 
fishery products.  Major South Korea exports consist of textiles, 
machinery and steel products (primarily for KIC operations). 
 
           Inter-Korean Trade by Type in 2008 
           ---------------------------------- 
(Unit: USD 1,000) 
 
Commercial Transactions 
----------------------- 
                  South Exports South Imports      Total 
                  To North      from North 
                  ------------- -------------      ----- 
General Trading   32,985(64)    366,446(-17) 399,431(-13.4) 
 
Processing-on 
Commission(POC)  150,962(20)    257,345(26)  408,307(24) 
 
SEOUL 00000315  002 OF 004 
 
 
 
KIC Project      518,342(53)    290,103(187) 808,445(84) 
 
Mt.Kumgang 
Tourism Project   52,207(-47)    11,506(-27)  63,713(-45) 
 
Other Economic 
Projects          14,329(35)      5,583(331)  19,912(67) 
 
Light Industry 
Cooperation       10,845(-85)     1,215(-2)   12,060(-83) 
 
Subtotal         779,670(40)    932,198(498)1,711,868(20) 
 
Non-Commercial Transactions 
--------------------------- 
               South Exports South Imports      Total 
               To North      from North 
               ------------- -------------      ----- 
NGO Aid         66,687(-73)      0            66,687(-73) 
 
Government Aid     373(-99.5)     0              373(-99.5) 
 
Social,Cultural 
Projects         1,193(37)      54(35)         1,247(34) 
 
Energy Aid      40,194(9)        0(0)         40,194(9) 
(HFO) 
Subtotal       108,447(-70)     54(8)        108,501(-70) 
 
TOTAL          888,117(-14)932,252(22)     1,820,369(1.2) 
-----          -----------------------     -------------- 
(1)Source: Korea International Trade Association and 
           Ministry of Unification 
(2)Note: Figures in parenthesis indicate the comparison from 2007. 
 
 
¶2. (U) Pyongyang Hemp to Start Operation in March Pending Wage 
Agreement:  Radio Free Asia reported in January that Pyongyang Hemp, 
a joint-venture between South Korea's Andong Daema Spinning and 
North Korea's Saetbyeol General Company, plans to start its 
Pyongyang operation in March.  Construction of the factory was 
completed on October 30, 2008.  The company is currently negotiating 
with its North Korean partner on wage rates; the North Korean 
partner is reportedly demanding USD 120 per month for North Korean 
workers  (Note:  The DPRK receives USD 75 per worker at KIC).  A 
total of 250 North Korean workers are already employed by the 
company; once it is in full operation in March, the number of North 
Korean workers is expected to rise to 750.  Pyongyang Hemp will also 
be involved in logistics in North Korea, operating 40 trucks (twenty 
11.5 ton trucks and twenty 8.5 ton trucks).  The trucks will run 
between Sinuiju-Pyongyang and Nampo-Pyongyang to transport raw 
materials sent from South Korea for processing-on-commission trade. 
Approximately 100 factories in Pyongyang are currently involved in 
processing on commission trade for ROK firms. 
 
 
Domestic Economy 
---------------- 
 
¶3. (U) DPRK Re-establishing Economic Development Planning Process: 
Chosun Sinbo, a pro-North Korea newspaper based in Japan, reported 
January 5 that North Korea has been making efforts to activate the 
economy by establishing annual economic development plans since last 
year with the aim of building a "Strong and Prosperous Nation" by 
¶2012.  While the North Korean government has not made any official 
announcement of the plan, the newspaper hinted that the DPRK has 
effectively re-instituted the 5-year economic planning process. 
 
¶4. (U) DPRK Cracks Down on Markets to Stem Imports:  South Korea's 
Chosun Ilbo recently reported that North Korean leader Kim Jong-il 
ordered a crackdown on street markets in a move to reassert control 
over the economy amid an influx of foreign goods into North Korea. 
DPRK authorities have ordered that all manufactured goods and 
imported items be sold at state-run shops rather than markets from 
January this year.  While street markets have been allowed in North 
Korea in recent years, North Korean officials are reportedly 
concerned about the infiltration of movies and music CDs from 
Western countries and South Korea.  The newspaper reported that an 
unnamed Ministry of Unification official said that he had heard 
 
SEOUL 00000315  003 OF 004 
 
 
about the crackdown but could not confirm the details.  Park 
Hyeong-joong, a senior research fellow at the Korea Institute of 
National Unification said, "The growth of markets poses a threat to 
the North Korean regime.  However, a complete crackdown would be 
impossible to enforce because North Koreans rely on the markets to 
make a living." 
 
¶5. (U) DPRK Upgrading Thermal Power Plants to Increase Electricity 
Output:  North Korea's Central News Agency (KCNA) reported January 
13 that the DPRK plans to upgrade thermal power plants to increase 
electricity.  Kim Man-soo, North Korea's Electricity and Industry 
Vice Minister was quoted by KCNA as saying that the country will 
"modernize operations of major thermal power plants such as Bukchang 
and Pyongyang Thermal Power Plants in the North to increase 
electricity output." 
 
¶6. (U) Foreign Exchange Rates Fluctuate in DPRK:  'Open DPRK 
Communications,' a South Korea-based online news service focused on 
North Korea, on January 12 reported that the U.S. dollar and the 
Chinese yuan greatly appreciated against the DPRK won late last 
year.  The newsletter cited Chinese-DPRK traders as saying that the 
recent depreciation of the North Korean won against the US dollar 
and the Chinese yuan was in part caused by a temporary crackdown by 
China on border trade with North Korea.  Some observers suggest the 
crackdown was in retaliation for the North's reported official 
complaint about the (alleged) inferiority of Chinese imports. 
Another factor cited as fueling the depreciation of the DPRK won is 
North Korea's recent pressure on market activities.  The report said 
the rates reached 3,630 DPRK won per U.S. dollar in December.  For 
reference, the rate was 200 DPRK won per U.S. dollar in July 2002. 
 
 
Foreign Aid 
----------- 
 
¶7. (U) WFP Cites Lack of Resources in Partial Suspension of DPRK 
Food Distribution:  Paul Risley, a WFP spokesperson, said in an 
interview with Voice of America on January 13 that the WFP has 
suspended food distribution in most of areas in North Korea due to 
lack of food and operational funds.  Food is only distributed to 
infants and pregnant women in limited areas in the North.  WFP aimed 
to raise around USD 530 million for its emergency food aid program 
through November 2009, but as of January 7, only USD 19.3 million 
was raised, just 3.8 percent of the targeted amount. 
 
¶8. (U) DPRK Strengthens Avian Influenza Prevention in Cooperation 
with International Organizations:  Radio Free Asia reported January 
13 that North Korean authorities are making efforts to strengthen 
avian influenza (AI) preventive measures in a close cooperation with 
the Food and Agriculture Organization (FAO) and World Health 
Organization.  Morgaria Subhash, an FAO AI expert said, "At the 
moment, we work with North Korean government to help them to build 
the physical capacity to make diagnoses and get equipment.  Now the 
DPRK government is working to get equipment sent by FAO.  The DPRK 
is also being trained to be able to investigate and respond to any 
AI outbreak very rapidly."  Vis Smitha, a WHO officer, said that 
there has been no AI outbreak in the North so far, and that DPRK 
authorities have been following the relevant WHO guidelines.  In 
addition, the DPRK sent a high-level delegation to an AI-related 
international symposium held in Egypt in November 2008 to prepare 
for any possible AI outbreak. 
 
¶9. (U) Methodist Groups Send Food and Other Aid to North Korea: 
Radio Free Asia reported January 15 that the British Methodist 
Church Foundation plans to donate USD 6,600 to help North Korea. 
The donation will be used to refurbish and operate a ramyeon 
(instant noodle) factory, a bakery and a green house in the North. 
Meanwhile, the Korean Methodist Church will send 6,000 sets of warm 
underwear to North Korea by sea. 
 
¶10. (U) UNICEF Provides New Vaccine Storage Equipment to DPRK: 
UNICEF plans to replace refrigeration facilities for vaccines in 
North Korea this year,  Kamrul Islam, chief of UNICEF's Health and 
Nutrition office in North Korea said in an interview with Voice of 
America on January 22.  UNICEF also plans to train North Korean 
technicians.   UNICEF conducted a site survey in 203 counties in the 
North in 2008.  The ten-year project includes cooperation with the 
Global Alliance for Vaccines and Immunization (GAVI) to strengthen 
disease prevention in the North.  In addition, UNICEF in January 
began nationwide surveys on North Korea's health and hygiene 
 
SEOUL 00000315  004 OF 004 
 
 
situation.  UNICEF's Pyongyang Representative, Gopalan Balagopal, 
said, "Based on the findings, we are intending to strengthen the 
program this year." 
 
¶11. (U) ROK Provincial Government to Build Pig Farm in DPRK:  Jeju 
Provincial Government announced on January 16 that it plans to send 
220 million won (USD 159,190) of equipment to build a pig farm in 
North Korea.  The equipment consists of pens, feeders, heat lamps 
and ventilators.  Once construction of the pig farm is completed in 
May this year, the provincial government will send 100 black pigs -- 
traditionally considered to be especially nutritious -- for breeding 
stock.  The Provincial government expects the pig farm will help 
feed children and elderly North Koreans.  The Jeju Provincial 
government set up this project with North Korea when a group of Jeju 
citizens and officials visited Pyongyang in 2007. 
 
 
Foreign Trade and Investment 
---------------------------- 
 
¶12. (U) DPRK Restricts International Communications for Trading 
Companies:  Radio Free Asia in January reported a Chinese source 
doing business in North Korea as saying that the DPRK has restricted 
international communications for major North Korean trading firms. 
Communications with North Korean counterparts have become more 
difficult because they are now required to go through a center 
established by the DPRK with the express purpose of monitoring 
communications.  Previously, incoming international communications 
could be routed directly to major North Korean trading firms which 
used internal telephone/fax lines.  Some firms such as Pyeonghwa 
Motors, a South Korean joint-venture automaker, are reportedly still 
allowed to use direct international communications channels. 
Meanwhile, according to the January newsletter of Good Friends, a 
South Korea-based civic group helping North Korea, some North Korean 
government officials have recently been prohibited from using the 
mobile phone service launched in Pyongyang on December 15 by 
Orascom, an Egyptian telecommunication firm. 
 
¶13. (U) DPRK Sets Up Consular Office in Dandong to Expand Trade with 
China:  Chosun Ilbo in January cited reporting that North Korea 
recently established a consular office in Dandong, a Chinese border 
city just across from Sinuiju.  The small consular office is 
intended to expand trade with China and to control North Koreans' 
activities along the Chinese border.  Dandong is regarded as the 
gateway of DPRK-China trade, with 70 percent of the goods shipments 
between the two countries occurring there.  North Korean diplomats 
in the Dandong consular office will be charged with providing 
administrative support for trade between China and North Korea. 
 
¶14. (U) DPRK Diplomats in Nepal Purchase Excessive Oil and Gas Duty 
Free:  RFA cited Nepalese English Telegraph Weekly reporting 
indicating that North Korean diplomats in Nepal have been purchasing 
large volumes of oil and petroleum duty free.  They have been 
purchasing 12,000 liters of diesel and 12,000 liters of gasoline 
duty free every month.  The weekly questioned how the North Korean 
Embassy in Nepal was able to consume that much fuel when it has only 
four vehicles registered with Nepalese authorities. 
 
¶15. (U) DPRK Considers Setting Up Free Trade Zone on Wihwa Islet 
near Chinese Border:  The Japanese paper Yomiuri Shimbun reported 
January 20 that North Korea has been considering establishing a free 
trade zone on Wihwa Islet along the Yalu River near the Chinese 
border.  The newspaper claimed that the North's plan was to secure 
food by expanding the border trade with China.  The Wihhwa islet, on 
a 15.5 square-kilometer site, belongs to the city of Sinuiju, which 
North Korea attempted and failed to develop into a special economic 
zone in 2002.  According to sources, North Korea will allow Chinese 
citizens to visit the area without a visa to trade daily commodities 
and foods.  China is reportedly considering building a new bridge in 
the area to connect with North Korea, since the existing China-DPRK 
Friendship Bridge is aging. 
 
STEPHENS