Interview on Economic Training 2.0 in North Korea (Part 2)

This picks up from a previous blogpost. I was interviewed by a Korean journal focused on inter-Korean issues. I provided my opinion on how economic policy should evolve in North Korea, and what organizations like Choson Exchange must focus on to facilitate that transition. The interview was translated into Korean. I have included parts of the English transcript below: What are your thoughts on meeting North Koreans? What is interesting about how North Koreans think?

The generation gap in people's thinking is obvious and important. A young candidate we selected for our program in Singapore impressed our ex-Foreign Minister and former Managing Director of Temasek Holdings by asking why Singapore chose to hold assets under a sovereign wealth fund rather than privatizing those assets. Such an insightful question requires the ability to think about abstract differences in systems, and also reflected the generation gap in the way North Koreans over 50 years old think, versus someone in their 20s. While the people over 50s tend to stick to more "politically correct" answers, younger people in the program are able to ask tough and insightful questions.

North Korea's living standards are low. What is necessary for them to improve their living standards?

When Singaporean policymakers emphasize the Rule of Law in developing a competitive economic system, older North Koreans rebut by claiming that they already have investment laws in place guaranteed by their constitution - forgetting that laws are only as good as its implementation. North Korea focuses too much on hard infrastructure (e.g. roads, technology, equipment) as a solution to their development problems, and too little on soft infrastructure (e.g. good governance, rule of law, and informed economic or monetary policy). This is a major obstacle to long-term economic development or even to their short-term efforts to bring in investments.

See part 1 here.

Who Does Business in Rason?

When possible, we will try to profile companies and organizations we come across. This is our first. Jilin Tobacco Industry Co. Ltd. (JTICL)

When visiting North Korea or China, one is struck by the number of men who smoke -  the two countries have some of the highest rates in the world. In China, about 53% of men smoke. In North Korea it is a similar figure, despite efforts by the government to lower the smoking rate. As such, the tobacco industry is of huge significance in both countries and will undoubtably play a role in in the ever-expanding trade relations between the two countries.

Jilin Tobacco Industry is based in Changchun, where apparently they will soon have a shiny new building. They are a private-sector company, but in China the tobacco industry is not so simple. A State Tobacco Monopoly Administration exists, which oversees the China National Tobacco Company. This SOE controls all distribution channels and pricing mechanisms, but allows regional firms to  develop regional brands and fill orders, effectively outsourcing production. The two national organizations work closely with regional companies -  in the case of Jilin Tobacco, helping develop the Changbaishan brand, for example. They take a cut of the locally earned profits in the form of a tax or fee.

In 2008, the State Tobacco Monopoly Administration gave Jilin Tobacco permission to establish a joint venture with North Korea’s Taedong River Tobacco Co. Ltd. and Nason Shinhung Tobacco Co.

They now operate a factory in Rajin, which primarily produces cigarettes for export to countries including Qatar, Japan and Taiwan. The Rajin factory has 100 employees, a small percentage of Jilin’s total workforce of 5000, so it appears that some combination of concerns about infrastructure and political commitment have prevented rapid expansion of the Rajin operation.

The factory  also produces cigarettes for the local market, which I had the 'good fortune' to try.  It was harsher than KCNA rhetoric. A company representative then showed off Jilin’s top brand, which he proudly claims sells for over 10 dollars. The higher quality brands are made in China.

The rep told us that labor costs are cheap enough to warrant the current level of commitment. Expansion in the future was a possibility, he said, but did not know of any concrete plans. The imminent completion of the highway to China may facilitate more production of cigarettes for the Chinese market.

Interview on Economic Training 2.0 in North Korea (Part 1)

I was interviewed by a Korean journal focused on inter-Korean issues. I provided my opinion on how economic policy should evolve in North Korea, and what organizations like Choson Exchange must focus on to facilitate that transition. The interview was translated into Korean. I have included parts of the English transcript below: What are your current activities and what are you focused on?

Currently, we focus on training next-generation North Korean policymakers (under 40) in economics, business and law. Based on internal discussions and feedback from programs, we decided that we need to 'upgrade' to a training 2.0 model. General exposure to economic, business or legal theories are not helpful. Instead, we pursue a "consulting" relationship, where we work with NK partners to understand the economic problems they need to solve, and work with foreign experts to provide concrete solutions that can be communicated to our partners during our programs.

Can you introduce the primary activities of your organization?

It is an exciting time for us in North Korea, as there are a lot of new economic institutions or departments being set up that we think is worth working with, although progress is slow because of a lack of funding. In general, we work with North Koreans to identify specific economic or business challenges, and develop an agenda defining what they need to learn based on the issues. Based on this agenda, we provide workshops (e.g. fiscal strategy and taxation) in North Korea where 1 workshop leader is assigned to at most 8 North Koreans to facilitate discussions. We have also brought North Koreans to consult policymakers in Singapore, as North Koreans are very interested in Singapore's economic development.

Our longer-term strategy is to move to the training 2.0 model which I mentioned above. We identified two key problems with capacity building programs which we think is feasible to tackle:

First, the gap between training and implementation of knowledge must be made smaller. Instead of general discussions of economics or business, we now require NK institutions to prepare a specific agenda where they identify policies they think is feasible to review within a five year time frame. We can then focus training programs on these areas if we think the change will be positive for NK's economic development.

Second, there is also a lack of cross-institution communication in North Korea. As a result, institutions lack a common understanding of problems and a common economic strategy. What we need is to provide opportunities for these institutions to develop that common vision. An idea we are keen to explore was raised by a young North Korean who attended our program in Singapore. He suggested that North Korea create an economic strategy think tank.

(To be continued...)

Have Management Consultants Infiltrated North Korea?

McKinsey, BCG and Bain-type consultants have been involved with business training for North Koreans informally and in their private capacities through our programs. As more North Koreans dive into business and entrepreneurship, the transfer of data-driven analytics and modern management theories is increasingly important. On the other hand, corporate America and management consultants in particular are often (and perhaps unfairly) accused of speaking in jargon and buzzwords that confuse more than they illuminate, and it would be a shame to inflict such horror on North Koreans. To my surprise, a corporate buzzword has penetrated North Korean society. On November 4th this year, KCNA, North Korea's state-run news agency, reported on a Provincial "Innovators" meeting.

Pyongyangites Meet to Welcome Jagang Provincial Innovators Pyongyang, November 4 (KCNA) -- A Pyongyang mass meeting took place at the Pyongyang Indoor Stadium Friday to welcome officials, labor innovators, scientists and technicians from the Huichon Ryonha General Machinery Plant. … Those innovators set an example in every aspect including development and production of new products, economic management and improvement of production environment by fully displaying the Kanggye spirit, thus further glorifying the undying leadership feats of Kim Jong Il and strikingly proving again that science and technology guarantee a thriving nation, he said.

October Rason Trip Findings

In October 2011, John Kim, a board director of the Choson Exchange, visited the Rajin-Sonbong Special Economic Zone. The following is a summary of some of his findings based on site visits and talks with senior officials in the SEZ. An longer account of his travels and impressions will be available soon. This information helps elaborate on our report from August. Rajin Port

The Rajin Port employs 1400 workers. The Chinese have conducted feasibility tests regarding two new piers, but currently the port houses three piers with 9-9.5 meters draft. A 30,000 metric ton coal storage warehouse was built at Pier 1 by the Chinese, who moved 80,000 metric tons through the facility in five shipments from January to September. Pier two, largely dedicated to container shipment, is currently dormant and a Swiss company is currently using Pier 3 to ship manganese and talc out of the region. The Russians also have a 49 year lease agreement signed in 2008.

Oongsang Port

Oongsang Port exported Russian lumber until 1985, but remains largely quiet now except for the occasional fishing boat. The present draft of 7 meters constricts any major future activity, so the North Koreans hope to bring in over $100M to widen the draft to 9 meters. After Rajin Port activity surpasses capacity there, Oongsang Port will become the next regional hub for drybulk activity.

Sonbong Port

Originally opened in the early 70’s, the draft within the port is 7 meters, but a fully laden Very Large Crude Carrier containing 270,000 metric tons of oil can offload at an offshore facility further out at sea. Two pipes, 63 cm in diameter, run for 9km underground before reaching the storage facility at “Victory Petrochemical”, a simple refinery that was designed to refine crude and send oil products (gasoline, naphtha, jet fuel, diesel and fuel oil) back to the port for export. In addition to this two way flow, fuel oil also arrived sporadically at the port as part of aid packages from 1994 to 2008.

Sonbong Power

This power plant was originally designed to take fuel oil from Victory Petrochemical as feedstock and generate power to feed back to Victory. Since the refinery has been offline, Sonbong Power has at times provided electricity to the region, but with fuel oil prices close to $700/metric ton and current electricity prices at 6.5 eurocents/kwh, the economics of running the plant do not work leaving the 800 workers employed here largely idle.

Victory Oil Refinery

Literally translated as “Victory Chemical Plant”, this refinery was completed in 1973 with a 40,000bbl/day crude distillation unit that typically yields 40~50% residual fuel oil for an average crude feed. Investment into upgrading capacity in the international market has led to an eroding of margins for simple refineries like Victory. Currently the refinery is idle and would need over $500M in investment to become competitive.

Hye Song Trading Company

Mr Kim visited a Sewing Factory owned by Hye Song, which runs 8 such factories employing 2000 workers. Output is recorded for the entire year on a bulletin board at the front entrance of the company. All employees except the handyman were women.

Cell Phone use more prevalent

The number of cell phone users in the DPRK crossed 1 million earlier this year and one official commented that the overwhelming majority of urban households have at least one cell phone. This particular official had 4 phones for a household of 3. Foreigners are allowed to use cell phones on a different network, and users of the domestic and foreign network can not call each other.  All usage is prepaid.

Handset Type	Purchase Costs	Usage Costs
Local	1570-2200 RMB	250 minutes and 20 text messages, while each additional minute is charged at 60 NKW (about .1 RMB/min)
Foreigner	1800-2400 RMB	Does not include any free minutes and are charged at 2RMB/min

Banking System has room for growth

There are two banks in Rason, the Central Bank, which is focused on domestic transactions, and the Golden Triangle Bank, which is focused on foreign currency transactions. Transactions for goods and services are conducted almost entirely in cash, usually in RMB or NKW. Mechanisms for savings are credit have room for development. As banks take a fee to deposit and withdraw cash, merchants prefer to hold money in cash (usually RMB). Credit is also available almost exclusively through friends or family.

Bottlenecks

A number of issues require solving if Rason is serious about attracting large scale foreign investment. Among these are reliable access to travel visas, reasonable communications costs with the outside world, a more mature banking system with savings and credit mechanisms and favorable tax treatment with a consistent legal framework. The mere fact that Rason is experimenting with market reform is encouraging, and Mr Kim is optimistic about economic development in the region and the nation as a whole.