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Kaesong pushes DPRK to internalize reform

Wednesday, December 13th, 2006

Joong Ang Daily
Lee Young-jong
12/13/2006

North shows an interest in Kaesong legal systems

North Korea has shown interest in introducing the legal taxation and accounting systems used in the market economy at the Kaesong Industrial Complex, Vice Unification Minister Shin Un-sang said yesterday.

Speaking at an academic forum sponsored in Seoul by the North Korean Law Research Institute to discuss how to establish the systems in the complex, Mr. Shin said, “North Korean officials’ perceptions in regard to establishing market-economy legal systems for the Kaesong Industrial Complex are changing. In the past, they have shown negative perceptions, but lately they have expressed a high interest and sympathized with the necessity of those systems.”

The vice unification minister said establishing a legal framework in line with international standards is essential for the stable development of the complex.

In the complex, 15 subregulations on taxation, labor and so on have been enacted since it opened in December 2004. Currently, about 10,000 North Koreans work in 18 South Korean companies in the complex.

Meanwhile, Jay Lefkowitz, the United States’ special envoy on human rights in North Korea, said last week that Seoul needed to use the complex as a pretext to pressure Pyongyang on human rights issues by opening it up for international inspection.

He said Seoul was one of the few countries to have enough leverage to pressure the North.

Korea Times
Lee Jin-woo
12/12/2006

Kaesong to Test Market Economy

Vice Minister of Unification Shin Un-sang said Tuesday North Korea is interested in introducing a market-style economy in the joint inter-Korean industrial complex in Kaesong, North Korea.

“It’s been true that North Korea has been quite reluctant about introducing market economy-based regulations,” Shin said during a seminar on inter-Korean relations and North Korean law held in Seoul. “However, they recently agreed on the need to develop new legal conditions for the Kaesong Industrial Complex, especially in terms of taxation and accounting.”

The vice minister said the new regulations for Kaesong have great symbolic meaning in that they would significantly help North Korea better understand the legal system of a market economy, which is different from their Stalinist system.

Shin predicted that if the market system is working successfully in Kaesong, North Korea would expand the capitalist system in the rest of the country although he was unsure when the expansion would be made.

Shin, however, said there would be a number of stumbling blocks that the two Koreas have to deal with, as the two nations’ legal systems differ in many respects.

The two Koreas abide by a special law comprising some 15 lower-level regulations on minimum wages and basic taxation, mainly aimed at the management of the joint inter-Korean venture.

The number of North Koreans working for the 18 South Korean firms at the industrial complex surpassed 10,000 last month, according to the Ministry of Unification.

It’s been 34 months since Hyundai Asan, the South Korean developer of the joint industrial park, first hired a group of 42 North Korean construction workers in February 2004, the ministry said.

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Posted in Economic reform, Kaesong Industrial Complex (KIC), Labor conditions/wages, Law Research Institute | Comments Closed

DPRK restricts some state employees from selling in markets

Friday, December 8th, 2006

Daily NK
12/8/2006

The North Korean authorities started to prohibit national companies employees’ sales activities while being absent from their workplaces.

According to a telephone interview with the Daily NK on Wednesday, an inside source said “From December 1, those who receive daily ration of 700g are strictly banned from participating in sales activities in private markets,” and “office employees are ordered to come back to their original company.”

The policy is aimed at those who receive 700g of daily ration, including laborers, office workers and public officials.

However, few of them actually are actually receiving rationing; even though their names are put on local party committee’s ration list, only senior party officials, security officers and workers of a few main national companies. In other words, North Korean workers are being forced to show up at work and prevented from sales activities although they will not receive salary.

Given the situation that most of factory workers depend on sales, smuggling, private farming and brokerage, the measure by the North Korean authorities would definitely threat livelihood of many people.

“Subject to 700g ration” is a common term to designate adult male citizen who are older than 17 and liable to be stationed in a workplace.

And family members dependent on the adults are subject to receive 300g of rationing; housewives, children, the elderly and handicapped citizens are classified as not eligible to work and, therefore, receiving 300g ration.

Recipients of 300g of ration were allowed to sell in private markets

Since the economic slowdown, actual amount of rationing is reduced from 700g to 534g. Other sources told the Daily NK that only recipients of 300g of ration were allowed to sell in private markets.

Thus, since mid-November ‘Central Party anti-socialist activity inspection team’ has been deployed to north Hamkyong province’s border region and local party organs and market management offices have started to regulate sales activities.

From now on, every vendor must provide documents to prove that they are not eligible to work and subject to receive 300g of ration to local governments’ labor departments and market management offices.

In the mid 90s during the March of Tribulation, rationing system collapsed and factories stopped operating. And since then, laborers have sought living on their own.

A 39-year old former defector from Hoiryeong, north Hamkyong province expected “single mothers responsible for their families’ living” would be hit most severely by the policy. The defector added “the women who lost their husbands are categorized as 700g ration recipients but do not receive any salary from their companies,” and “if they are prohibited from business, more women would cross the border from next year.”

Mr. Park, an NGO activist helping North Korean refugees in northeast China, said ‘the policy will only end up in an empty phrase’ as resumption of nation-wide rationing did so a year ago.

“I think Kim Jong Il miscomprehends the situation,” Park said with uneasy voice. “He might be under an illusion that recommencement of rationing system is working well and, therefore, it is time to make a national mobilization of labor forces to industrial production.”

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Posted in Agriculture, General markets (FMR: Farmers Market), Labor conditions/wages | Comments Closed

EU investigating DPRK working conditions–in Europe.

Monday, December 4th, 2006

Donga (Hat tip to One Free Korea)
12/4/2006

The European Parliament has begun an investigation in response to allegations that the North Korean government dispatched hundreds of workers to European countries and forced them to send their wages home.

Last Saturday, the Mainichi Daily of Japan reported that the European Parliament planned to finish its investigation by next spring and issue a report thereafter. For the investigation, the parliament is also considering questioning people in countries where North Korean workers stay.

It is estimated that the number of workers that the North Korean government sent to overseas countries such as the Czech Republic, Poland, Russia, the Middle East, and Africa is anywhere from 10,000 to 15,000. Currently, 400 North Korean workers, mostly women, are staying in the Czech Republic and working in sewing factories in the suburbs of Prague, the capital of the Czech Republic.

Their monthly salaries are well above the country’s minimum wage of about 285,000 won. However, the European Parliament estimated that a large part of their salaries is deposited into a collective bank account controlled by the North Korean government. In addition to this, the North Korean government takes away more of workers’ salaries by forcing them to buy propaganda videos produced by the government.

The Mainichi Daily also covered the case of one North Korean man who is working for a shipbuilding company located in Gdansk in the northern part of Poland. The story reported that North Korean workers’ salaries goes to the bank account of a North Korea’s state enterprise first, and in the end only 30 or 40 percent of it is left in the hands of workers.

A source from a company that arranges North Korean workers to go to factories in Poland said, “They get paid 4,000 Zloty, or about 1.3 million won, a month, which is sent to the bank account in Poland of a North Korea state enterprise, and workers are only receiving 400,000 or 500,000 won a month.”

István Szent-Iványi, vice-chairman of the delegation for relations with the Korean Peninsula in the European Parliament, said, “North Korean workers are treated like slaves now because they are working under inhuman conditions and thoroughly monitored by their government.”

However, one senior North Korean worker (aged 45) at a shipbuilding company in Gdansk said, “We are well fed now and enjoy a glass of beer every day. Every day seems to me like my birthday and the North Korean Embassy in Warsaw even delivers kimchi to us.”

The Mainichi Daily hypothesizes that North Korea may be sending workers oversea as a way of overcoming financial crisis.

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Posted in EU, Labor conditions/wages | Comments Closed

Hyundai Asan may reduce jobs, wages at Kumgang tour

Monday, November 20th, 2006

Joong ang Daily
11/20/2006

Hyundai Asan Corp., a South Korean company spearheading inter-Korean economic projects, said yesterday it is considering slashing jobs or wages at a scenic North Korean mountain resort that has been opened to Koreans.

The restructuring underscores how Hyundai Asan is struggling with a falling number of tourists to Mount Kumgang on North Korea’s east coast amid growing security concerns over the communist neighbor’s nuclear test in early October.

North Korea has opened the mountain to Koreans since 1998 as part of the South Korean government policy of engaging North Korea and helping Pyongyang’s moribund economy.

“The number of tourists is sharply falling to less than 100 people a day, due to the North’s nuclear test and seasonal factors,” said Hyundai Asan Chief Executive Yoon Man-joon, who was visiting the mountain resort to mark the eighth anniversary of the tourism project.

“We are now studying a number of ways to narrow losses, including a reorganization of the workforce,” he told reporters.

After the North’s missile tests in July and nuclear test last month, the tourism project is now facing its biggest challenge with the daily number of tourists dropping as low as 80, Hyundai Asan officials say. Hyundai Asan is delaying its plan to open the inner part of the mountain to South Korean tourists to March or April next year because of the falling number of tourists, Mr. Yoon said.

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Posted in Labor conditions/wages, Mt. Kumgang Tourist Special Zone, Tourism | Comments Closed

The Political Economy of Chinese Investment in North Korea

Wednesday, November 1st, 2006

Asian Survey
November/December 2006, Vol. 46, No. 6, Pages 898-916
Jae Cheol Kim
Professor of International Studies at the Catholic University of Korea, Seoul.

PDF here: chinainDPRK.pdf

Conclusion:
China’s investment efforts suggest that it has begun to engage North Korea economically. By investing, the Chinese leadership has attempted to push the North to embrace economic reforms, which in turn could improve the North Korean economy and reduce the country’s potential for political instability. In order to lead the North to embark on reform policies, Beijing has tried to provide it with seed money and technology by encouraging Chinese companies to invest. This suggests that despite expectations and allegations from the West that China might abandon its long-time ally, China is committed to supporting North Korea.

The Chinese investment, however, has increasingly been influenced by commercial considerations. Officials in Beijing have stressed that economic exchanges with the North must be mutually beneficial. Chinese companies, which have become responsible for the majority of the investment, have paid increasing attention to market share and natural resources. That China has increasingly tried to gain economic advantage in the North suggests that Sino-North Korean relations are being transformed from being ideology-motivated to interestmotivated.

Despite a stiff increase over the past couple of years, it is hard to say that Chinese investment is either full-fledged or irreversible. Because the instability of North Korea prevents Chinese entrepreneurs from fully embracing the country, Chinese investment must be seen as a pilot project, with Chinese companies and entrepreneurs testing the water. Looking to the future, Chinese investment in North Korea is likely to increase. Despite problems, the Chinese leadership will probably continue to encourage further investment in an effort to exploit developmental opportunities while simultaneously curtailing the flow of direct aid to the North. In addition, China’s dynamic economic growth will propel its overseas investment. As China’s capital account is gradually liberalized, cash-rich Chinese companies will look for markets and resources abroad to fuel their development. The potential appreciation of the yuan will further force firms to relocate factories producing low-end products to countries where the labor cost is lower. Seen from this perspective, North Korea is a good candidate for future Chinese investment—if there is no major turbulence in bilateral relations.

Highlights:
North Korea has been reluctant to follow China’s path of reform and opening because it worried that the policy may create political problems. In an apparent response to China’s recommendation in the late 1990s for reform, for instance, Kim asked Beijing to respect “Korean-style socialism.” But China’s support for reform is not unconditional. Although Chinese leaders have repeatedly urged the DPRK to embrace market-driven reforms (even taking Kim Jong Il is on tours to see the results of China’s economic reforms), when North Korea decided to set up a special economic zone in Sinuiju, apparently without prior consultation with Beijing, China aborted the project by arresting Yang Bin, whom North Korea had designated head of the zone, in October 2002.

China, however, does not want to see turbulence on the Korean Peninsula, which could not only lead to the economic and political collapse of a socialist regime on China’s border but could also threaten regional stability. China thus has tried to sustain the Pyongyang regime by providing economic assistance–believing that reform and opening would not only revive the North Korean economy but also reduce the need for regular aid to prop up the regime, Chinese Premier Wen Jiabao said that the Chinese government would encourage more of its companies to invest and establish their businesses in North Korea.

For Chinese firms, the prime minister’s statement amounted to a government directive, with some entrepreneurs understanding that Wen’s statement was a signal for Chinese companies to invest.  Organizations were formed to smooth such investment, including the Shenyang Municipal Association of Entrepreneurs (Shenyangshi Qiyejia Xiehui), Dandong Municipal Economic Consultation Center for the Korean Peninsula (Dandongshi Chaoxianbandao Jingji Zixun Zhongxin), and Beijing Sino-Korea Economic & Cultural Exchange Company (Beijing Chaohua Youlian). They organized explanatory meetings on investment, drawing numerous applicants.

Beijing attempted to boost investors’ confidence by signing an “Investment Encouragement and Protection Agreement” with Pyongyang in March 2005 when Premier Park Bongju visited Beijing. The framework for economic and technological cooperation was made clearer through the signing of an “Agreement on Economic and Technological Cooperation” that October. Chinese officials have given financial incentives and guarantees to firms that invest in North Korea. China’s state-run banks have not only provided companies with investment capital but also have underwritten Chinese investment for joint ventures. Beijing granted preferential treatment to products processed in the North, allowing them better access to the Chinese market. Products that were processed in the Rajin area with Chinese materials and then imported to China, for instance, were labeled domestic trade and were thus exempted from customs inspection.

The deputy CEO of Beijing Sino-Korea Economic & Cultural Exchange Company, a Beijing company that helps Chinese companies invest in the North, has been quoted as saying that whether a company is able to invest in North Korea depended not on the company’s will but on whether the North would accept it or not. Foreign investors, he added, needed to meet the criterion of “political reliability.” In practice, concerns about political contamination limit North Korea’s economic cooperation with South Korea, whose government has eagerly pushed economic integration with the North. North Korea’s opening therefore means an opening toward China, and this in turn gives Chinese companies very rare advantages.

Labor costs in the DPRK are low [compared to China], running only 70–80 yuan (about US$10) per month.  Building a factory is very cheap, up to one million yuan (about $120,000).  Chinese entrepreneurs see that what North Korea needs is largely light industrial products. Because brand consciousness there is weak, these investors believe that many Chinese companies, even small- and medium-sized ones, can compete in the North Korean market.  The scope for making profits is bigger in North Korea than in China because manufacturers can charge more for similar products in the North. For example, the price of a cigarette lighter is three to five yuan ($0.36 to $0.60) in Pyongyang but only 0.5 yuan ($0.06) in Wenzhou, China.

Although big state-owned companies account for the majority of Chinese outward investments, they rarely invest in North Korea, leaving this to small- to medium-sized companies. In the past, most Chinese investors were Korean-Chinese merchants from two areas in China: Liaoning Province and the Yanbian Korean Autonomous Prefecture. They do not expect that they can make profits in the North Korean market right away; rather, they plan to be ready for when the North opens to the world, by moving into the market early.

Chinese investment projects in North Korea are not only small in number but also weak in scale. There are no detailed data available on their average size, but they likely are no exception to the fact that China’s outward investment is generally characterized by its small scale and low level of technology.

Although North Korea wants capital in such sectors as home appliances, construction materials, electronic communications products, and machine building, Chinese investment is heavily concentrated in the sectors where China’s needs lie, such as resource extraction, or where its companies can make a profit, such as service sectors. The official Chinese guideline for outbound investment, noted above, recommended investment only in such manufacturing sectors as textiles, clothing, and food products, leaving aside other sectors for which North Korea wants investment.

The North lacks basic frameworks needed for drawing in foreign investment. Policies, laws, and regulations about tax, for instance, are not in place. There is no well established market mechanism for running the economy. The government is still heavily involved in economic management; therefore, potential investors need to have personal networks to open doors, a point that worries potential Chinese investors.  North Korea lacks a sound political environment for enticing foreign investment. The country’s economic policies, especially those related to reform, shift continuously, raising questions about the official commitment to reform.

Pyongyang Department Store No. 1
Zeng Changbiao, chief executive officer (CEO) of the Zhongxu Group, in a much publicized deal in 2004, signed a contract to run Pyongyang’s Department Store No.1 for 10 years. He said his main motive for investing was to take over the North Korean market. He wants to be dominant in the North Korean retail business by securing and expanding market share. But it is not clear whether the contract was put into practice.  An article in a journal published by the National Development and Reform Commission, a ministry-level organization of the Chinese government, suggested that little had changed at the department store by the middle of 2005. South Korean officials also say that the store is still run by North Korea. Zhongxu Group’s Zeng received the lowest tax rate—5% income and 5% import—in the North Korean tax system.

This is one of three big department stores that were being run either by the Chinese alone or jointly.  Shenyang Municipal Association for Trade Promotion opened Daesong Market in Pyongyang, the first wholly foreign-owned company in a non-science sector.

Musan
China has shown an interest in joint resources development projects. The best known case is the project to develop the Musan iron mines. It is not easy to draw an exact picture of Chinese investment in the mines because many press reports suggest different stories. According to a Korean report, a Chinese company from Jilin Province planned to invest about $500 million in the mines. Ta Kung Pao, a Hong Kong newspaper, reported that three companies from Jilin—Tonghua Iron & Steel Group (Tonggang), Yanbian Tianchi Company, and Sinosteel Corporation (Zhonggang)—contracted rights to exploit the Musan iron mines for 50 years. According to the report, the Chinese companies were going to invest 7 billion yuan (about $865 million) and planned to produce 10 million tons of iron ore each year.  In the case of the Musan mines, 2 billion yuan (about $240 million) out of the 7 billion China committed to invest was allocated to building roads and railways from Musan to Tonghua in China. Sizable investment levels might help Jilin secure access to seaports in North Korea.

Similarly, the Chinese press has reported that the Musan iron mines development project was canceled by officials in North Korea, embarrassed by publicity over the deal because it highlighted the degree of foreign investment, a subject that Pyongyang would prefer to handle quietly.

Raijin
Rason International Logistics Joint Company-Rason International secured the exclusive rights to run the No. 3 and No. 4 piers of Rajin port for 50 years. In order to secure the rights, China committed to investing 30 million euros ($36 million) to build an industrial park, tourism facilities, and a road from the trade district of Rason city to Rajin Port. North Korea in turn committed to providing China with 5 to 10 square kilometers of land to build the industrial park.

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Posted in China, Coal, Daesong Market, Department Store No. 1, Economic reform, Energy, International trade, Labor conditions/wages, Light Industry, Manufacturing, Mining/Minerals, Musan Mine, Political economy, Rason Economic and Trade Zone (Rajin-Sonbong), Sea shipping, Sinuiju Special Administrative Region, Trade Statistics, Transportation | Comments Closed

Perilous Journeys:

Thursday, October 26th, 2006

The Plight of North Koreans in China and Beyond
International Crisis Group
10/26/2006
PDF Here: Perilous Journeys.pdf

Executive Summary

Scores of thousands of North Koreans have been risking their lives to escape their country’s hardships in search of a better life, contributing to a humanitarian challenge that is playing out almost invisibly as the world focuses on North Korea’s nuclear program. Only a little over 9,000 have made it to safety, mostly in South Korea but also in Japan, Europe and the U.S. Many more live in hiding from crackdowns and forcible repatriations by China and neighbouring countries, vulnerable to abuse and exploitation. If repatriated to the North, they face harsh punishment, possibly execution. China and South Korea have held back, even during the Security Council debate over post-test sanctions, from applying as much pressure as they might to persuade Pyongyang to reverse its dangerous nuclear policy, in part because they fear that the steady stream of North Koreans flowing into China and beyond would become a torrent if the North’s economy were to collapse under the weight of tough measures. While there is marginally more hope Beijing will change its ways than Pyongyang, concerned governments can and must do far more to improve the situation of the border crossers.

Even without a strong response to the 9 October 2006 nuclear test that targets the North’s economy, the internal situation could soon get much worse. The perfect storm may be brewing for a return to famine in the North. Last year, Pyongyang reintroduced the same public distribution system for food that collapsed in the 1990s and rejected international humanitarian assistance, demanding instead unmonitored development help. Funding for remaining aid programs is difficult to secure, and summer floods have damaged crops and infrastructure.

Hunger and the lack of economic opportunity, rather than political oppression, are the most important factors in shaping a North Korean’s decision to leave “the worker’s paradise”. A lack of information, the fear of being caught by Chinese or North Korean security agents and financial limitations are more significant barriers than any actual wall or tight security at the border. China compensates for the virtual absence of border guards with a relentless search for North Koreans in hiding. In

October 2006, Chinese authorities began to build a fence along the frontier and conduct neighbourhood sweeps to find and arrest the border crossers. Despite these formidable obstacles, the willingness among North Koreans to risk their lives to escape is growing stronger, and arrivals in the South are likely to hit a record this year. The most important pull factor shaping the decision to leave is the presence of family members in China and, increasingly, South Korea. The nearly 9,000 defectors in the South are able to send cash and information to help their loved ones escape. To a lesser but significant extent, information is beginning to spread in the North through smuggled South Korean videos, American and South Korean radio broadcasts, and word of mouth – all exposing North Koreans to new ideas and aspirations.

Most North Koreans do not arrive in China with the intention of seeking official asylum, but because Beijing is making it ever more difficult for them to stay, a growing number are forced to travel thousands of kilometres and undertake dangerous border crossings in search of refuge in Mongolia or South East Asia. The mass arrests of 175 asylum seekers in Bangkok in August 2006 and a further 86 on 24 October provide vivid examples of host country hospitality being stretched to the limits.

The vast majority of North Koreans who have made it to safety resettle in South Korea. In most instances, this is a choice motivated by language, culture and the promise of being reunited with family members. In a growing number of cases, the overly burdensome procedures for being granted asylum anywhere else is the deciding factor. With the exception of Germany, the governments that have pressed most vigorously for improving North Korean human rights, namely the U.S., the European Union member states and Japan, have taken in only a handful of asylum seekers.

A loose network of makeshift shelters focused on humanitarian aid has evolved into a politically-charged but fragile underground railroad on which some North Koreans can buy safe passage to Seoul in a matter of days, while others suffer years of violence and exploitation. If they are to minimise the exploitation of the most vulnerable and enhance the much-needed aid this network delivers, concerned governments must commit to a sustainable solution.

None of the policies proposed in this report would create unmanageable burdens for any government. Unless North Korea’s economy collapses completely, the numbers of its citizens crossing international borders will continue to be restricted by many factors, not least Pyongyang’s tight controls on internal movement and the financial cost of securing an escape route. However, it is time to back up strong words and resolutions about the plight of North Koreans with actions, both because humanity demands it and because if the international community cannot quickly get a handle on this situation, it will find it harder to forge an operational consensus on the nuclear issue.

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Posted in Agriculture, Black markets, Economic reform, Emigration, International Aid, Labor conditions/wages, Political economy, Price liberalization, UN World Food Program | Comments Closed

ROK ministry claims Kaesong take-home wages at $10/month

Monday, October 23rd, 2006

From the Choson Ilbo:
10/23/2006

N.Korean Party ‘Takes 60 Percent of Kaesong Wages’
 
More than half the salaries paid to North Koreans working at the inter-Korean Kaesong Industrial Park go to the North Korean Workers’ Party, a document written by a team in charge of inter-Korean economic cooperation at the Ministry of Commerce, Industry and Energy shows. The team reported to the unification minister.

Grand National Party lawmaker Kim Gi-hyeon made the document public on Sunday. According to the memo, US$30 out of the monthly pay of $57.50 goes to the Workers’ Party. With $17.50 spent on insurance and other costs, North Korean workers at the complex are left with only $10 a month.

The Unification Ministry has publicly claimed that workers get $66 on average, with 30 percent spent on benefit packages of workers, like housing and medial expenses, and 70 percent going to the workers. A Unification Ministry official on Sunday denied the report. “It is the first I’ve heard about $30 going to the party,” he said. “How could the Industry Ministry know about something that the Unification Ministry didn’t know? We have no idea.”

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Posted in Kaesong Industrial Complex (KIC), Labor conditions/wages | Comments Closed

North Korea: an upcoming software destination

Tuesday, October 10th, 2006

Paul Tija
GPI Consultancy
October 10, 2006

IN PDF: IT_in_NKorea.pdf

Surprising business opportunities in Pyongyang

Dutch companies are increasingly conducting Information Technology projects in low-cost countries. Also known as offshore sourcing, this way of working means that labor-intensive activities, such as the programming of computer software, are being done abroad. Asia is the most popular software destination, and Indian IT firms are involved in large projects for Dutch enterprises such as ANB Amro Bank, KLM, Philips or Heineken. More recently, we notice a growth in the software collaboration with China.

As a Dutch IT consultant, I am specialized in offshore software development projects, and I regularly travel to India and China. Recently, I was invited for a study tour to an Asian country which I had never visited before: North Korea. I had my doubts whether to accept this invitation. After all, when we read about North Korea, it is mostly not about its software capabilities. The current focus of the press is on its nuclear activities and it is a country where the Cold War has not even ended, so I was not sure if such a visit would be useful. And finally, such a trip to a farshore country would at least take a week.

Nevertheless, I decided to visit this country. This decision was mainly based on what I had seen in China. I had already traveled to China five times this year, and the fast growth of China as a major IT destination was very clear to me. China is now the production factory of the world, but China’s software industry has emerged to become a global player in just 5 years. Several of the largest Indian IT service providers, including TCS, Infosys, Wipro and Satyam, have established their offices in China, taking advantage of the growing popularity of this country. However, I also noticed that some Chinese companies themselves are outsourcing IT work to neighboring North Korea. And since my profession is being an offshore consultant, I have no choice but to investigate these new trends in country selection, so I accepted the invitation to visit Pyongyang, the capital of North Korea. I happened to be the first Dutch consultant to research the North Korean IT-sector ever, and the one-week tour turned out to be extremely interesting. Quite surprisingly, the country offers interesting business opportunities for European companies.

Korea Computer Center
My study tour was organized by KCC (Korea Computer Center), the largest IT-company in the country. Established in 1990, it is state-owned and has more than one thousand employees. It is headquartered in Pyongyang and has regional branches in eleven cities. My accommodation has been arranged at the KCC campus, which comprises of several office buildings. It also has iown hostel, with a swimming pool, for foreign guests. These guests are mainly Asian (during my stay, there were Chinese delegations), so I had to get used to having rice for breakfast. In the evenings, the restaurant doubled as a karaoke bar, and some of the waitresses appeared to be talented singers. The campus is located in a rather attractive green area, and the butterflies flying around were the largest I had ever seen. It also has sporting grounds, and basketball was during my one-week visit the most popular game among KCC staff. An internal competition takes place during lunch hours.

Korea Computer Center is organized in different specialized business units. Before their representatives started with presentations, I received a tour through the premises. As is the case in India and China, the programmers at KCC also work in cubicles. KCC develops various software products, of which some are especially designed for the local market. Examples are a Korean version of Linux and translation software between Korean, Japanese, Chinese and English. They also produce software for Korean character and handwriting recognition and voice recognition. Other products are made for export, and North Korean games to be used on mobile phones are already quite popular in Japan. There are also games for PC’s, Nintendo and Playstation; their computer version of Go, an Asian chess game, has won the world championship for Go games for several years. The games department has a display showing all the trophies which were won during international competitions.

For several years, KCC is active as an offshore services provider and it works for clients in China, South Korea and Japan. For these markets, North Korea is a nearshore destination, and quite a few North Korean IT-staff do speak Chinese or Japanese. KCC also has branch offices in various Chinese cities, including Beijing and Dalian. It works for both foreign software product companies and end user firms, such as banks. For these clients, different types of applications have been developed, for example in the field of finance, security or Human Resources. Europe is a relatively new market for the North Koreans, and some of their products have been showed for the first time at the large international IT-exhibition CeBIT, in 2006 in Hannover, Germany.

The level of IT-expertise was high, with attention to quality through the use of ISO9001, CMMI and Six Sigma. KCC develops embedded software for the newest generation of digital television, for multimedia-players and for PDA’s (Personal Digital Assistants). Surprisingly, it also produces the software for the mobile phones of South Korean Samsung. I was shown innovative software which could recognize music by humming a few sounds. In less than a second, the melody was recognized from a database of more than 500 songs. Also applications for home use were developed, such as accessing the Internet by using a mobile phone to adjust the air conditioning. KCC also Photo: KCC campus in Pyongyang made software to recognize faces on photographs and video films. They gave me demonstrations of video-conferencing systems, and applications for distance learning. There was a separate medical department, which made software to be used by hospitals and doctors, such as systems to check the condition of heart and blood vessels.

Supply of IT-labor In countries such as The Netherlands, the enrollment in courses in Information Technology is not popular anymore among the youth, and a shortage of software engineers is expected. This situation is different in many offshore countries, where a career in IT is very ‘cool’. Also in North Korea, large numbers of students have an interest to study IT. I visited in Pyongyang the large Kim Chaek University of Technology, where there are much more applications, than available places. Although my visit took place during the summer holiday, there were still students around at the faculty of Informatics. In order to gain experience, they were conducting projects for foreign companies. I spoke with students who were programming computer games or were developing software for PDA’s. A large pool of technically qualified workforce is now available in North Korea. Some of the staff is taking courses abroad and foreign teachers (e.g. from India) are regularly invited to teach classes in Pyongyang.

Business Process Outsourcing
Some companies in Pyongyang are involved in activities in the field of BPO (Business Process Outsourcing), an areas which includes various kinds of administrative work. Because of the available knowledge of the Japanese language, the North Koreans are offering back-office services to western companies engaged in doing business with Japan.

In order to get an understanding of this type of work, I visited Dakor, which was established 10 years ago in cooperation with a Swiss firm. This joint venture is located at the opposite side of Pyongyang, across the Taedong river. It works for European research companies, and it receives from them scanned survey forms electronically on a daily basis. It processes these papers and returns the results within 48 hours to their clients. The company is also conducting data-entry work for international organizations such as the United Nations and the International Red Cross. Their data, which is stored on paper only, is being made available for use online. Dakor is also offering additional services, such as producing 2D and 3D designs for architectural firms, and it is also programming websites.

Animation
North Korea is already famous as a production location for high quality cartoons and animation. Staff of the American Walt Disney Corporation described the country as one of the most talented centers of animation in the world. The specialized state corporation SEK Studio has more than 1500 employees, and works for several European producers of children films. New companies are being founded as well, and I visited Tin Ming Alan CG Studio. This firm was set up in early 2006, and is located in a new office building in the outskirts of Pyongyang. Its main focus is in Computer Graphics and in 2D and 3D animation it uses the latest hardware and software, including Maja. Some of the staff of Tin Ming Alan speak Chinese and the company has a marketing office in China. They are hired by Chinese advertisement companies to make the animation for TV-commercials. It also works on animation to be included in computer games.  Several employees of this young company come from other animation studios and have more than ten years of experience in this field.

The North Korean IT sector seems to be dynamic, where new firms are being established, and where business units of larger organizations are being spun-off into new ventures. I visited the Gwang Myong IT Center, which is a spin-off from Korea Computer Center. It is specialized in network software and security, and it produces anti-virus, data encryption, data recovery, and fingerprint software. This firmis internationally active as well; it has an office in China and among its clients are financial institutions in Japan.

Issues of country selection
My study tour revealed that North Korea has specific advantages. The local tariffs are lower than in India or China, thus giving western firms the option of considerable cost reductions. The commitment of North Korean IT-firms is also high, and the country is therefore also an offshore option for especially smaller or medium sized western software companies. Outsourcing work to North Korea could also be used to foster innovation (e.g. developing better products or new applications). This country can be used for research as well (from Linux to parallel processing).  Based from my interaction with Korean managers and software engineers, I do not believe that the cultural differences are larger than with China or India. My communication with them, both formal and informal, was pleasant. Communicating with North Koreans is clearly less difficult than with Japanese.

The North Korean companies have experiences with a wide range of development platforms. They work with Assembler, Cobol, C, Visual Studio .Net, Visual C/C++, Visual Basic, Java, JBuilder, Powerbuilder, Delphi, Flash, XML, Ajax, PHP, Perl, Oracle, SQL Server, MySQL, etc. They can do development work for administrative applications, but also technical software, such as embedded software or PLC’s. North Korea is very advanced in areas such as animation and games, and I have seen a range of titles, including table tennis, chess, golf, or beach volley. The design of many of their applications was modern and according to the western taste.

Over the recent years, North Korea is opening up for foreign business. This process makes offshore sourcing easier, and even investing in an own software subsidiary or joint venture can be considered. This does not mean that North Korea is potential software destination for every user of offshore services. The country is a subject of international political tensions. In addition, a number of circumstances require specific attention, such as the command of the English Language.  As is the case with China, the North Korean IT staff are able to read english bu thtey do not speak it very well.  Another issue is the relative isolation of the country, and in order to arrange an invitation, a visa is required.  The limited number of direct flights is another disadvantage; one can only travel directly from Beijing or Moscow.  If projects will require a lot of communication or knowledge transfer, it might be recommended to do some parts of the work in China, by the Chinese branches of the North Korean companies. Executing a small pilot project is the best way to investigate the opportunities in more detail.

Conclusion
North Korea has a large number of skilled IT professionals, and it has a high level of IT expertise in various areas.  The country is evolving into a nearshore software destination for a growing number of clients from Japan, China and South Korea. An interesting example of their success is the work they are doing for South Korean giant Samsung, in the field of embedded software for mobile phones.

North Korean IT-companies are now also targeting the European market, and the low tariffs and the available skills are major advantages.  Smaller and medium sized software companies can consider this country as a potential offshore destination, and should research the opportunities for collaboration or investment in more detail. Taking part in a study tour, as I have done, is an excellent way to get more insight in the actual business opportunities of a country – not only in the case of North Korea but for all nearshore and farshore destinations.

Paul Tija is the founder of GPI Consultancy, an independent Dutch Consultancy firm in the in the field of offshore IT sourcing. E-mail: [email protected]
GPI Consultancy, Postbus 26151, 3002 ED Rotterdam
Tel: +31-10-4254172 E-mail: [email protected] http://www.gpic.nl

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Posted in Animation, Art, Cell phones, Communications, Computing/IT, Dakor, Economic reform, Foreign direct investment, GPI Consultancy, Gwang Myong IT Center, Intellectual Property, Kim Chaek University of Technology, Korea Computer Center (KCC), Labor conditions/wages, SEK Studio, Switzerland, Tin Ming Alan CG Studio | Comments Closed

Human Rights Watch weighs in on Kaesong

Monday, October 2nd, 2006

From Reuters:
North Korea: Labor Rights at Risk in Joint Industrial Complex
10/2/2006

The North Korean law governing the Kaesong Industrial Complex (KIC), a new industrial joint venture between North Korea and South Korean companies, should be amended to ensure adequate protections of basic workers’ rights, Human Rights Watch said in a new briefing paper released today. Although labor conditions for North Korean workers at the KIC likely represent an important step forward compared with the rest of North Korea, the law governing the complex and some practices by South Korean firms operating there still fall far short of international labor protection standards. The North Korean government wrote this law after consulting with the Hyundai Asan Corporation, the unit of the South Korean conglomerate Hyundai Group that is in charge of developing the complex.

“Given the dire circumstances in North Korea, the opportunity for people to work at facilities like Kaesong represents a small step forward,” said Sophie Richardson, deputy Asia director at Human Rights Watch. “But unless workers’ rights are codified into legal protections, those rights could be violated with impunity at Kaesong.”

The 19-page briefing paper, “North Korea: Workers’ Rights at Kaesong Industrial Complex,” (or here in pdf) provides an overview of labor conditions at the KIC, an industrial complex located in North Korea. It documents the KIC Labor Law’s shortcomings in the areas of the freedom of association, the right to collective bargaining, the prohibitions on sex discrimination and harassment and harmful child labor, among others.

The KIC opened in June 2004 under a contract between North Korea and South Korea’s Hyundai Asan Corporation and South Korea’s state-owned Korea Land Corporation. The complex is located between the North Korean city of Kaesong and the western border between the two Koreas. The workers produce goods mostly for the South Korean market, including watches, shoes, clothes, kitchenware, plastic containers, electrical cords and car parts, among other items. As of August, more than 8,000 North Korean workers were employed by 13 South Korean companies.

Human Rights Watch also found that South Korean companies are violating the existing KIC Labor Law, which stipulates that employers should pay workers directly in cash. An employers’ representative told Human Rights Watch that the South Korean companies have been asked instead to pay workers’ wages in U.S. dollars directly to the North Korean government, which in turn pays the workers in North Korean won after deducting a mandatory 30 percent contribution to a social welfare fund.

“The fact that North Korea has already managed to get South Korean companies to violate worker’s rights on wage payments is not only an embarrassment, but also raises concerns about other violations at Kaesong,” said Richardson.

North Korea is a party to four main international human rights treaties: the International Covenant on Civil and Political Rights; the International Covenant on Economic, Social and Cultural Rights; the Convention on the Elimination of All Forms of Discrimination against Women; and the Convention on the Rights of the Child. All provide important workers’ rights protections, including the right to freedom of association and collective bargaining, and ban sex discrimination and harmful labor for children. As a party to these international human rights treaties, North Korea has a legal obligation to protect these rights.

Human Rights Watch has not yet been given access to interview North Korean workers at the KIC. The briefing paper is based on information obtained from South Korea’s Ministry of Unification, a representative of the South Korean companies operating at the KIC, and other sources, including an analysis of KIC’s labor laws.

North Korea should allow South Korean companies to pay the workers directly in cash, as stipulated in the KIC Labor Law, and it should amend the Labor Law to meet international labor standards and ensure the law is effectively enforced. Human Rights Watch called on North Korea to join the International Labor Organization (ILO), sign its core treaties, and invite ILO officials to discuss the protection and promotion of workers’ rights.

South Korea should ensure that South Korean companies are respecting workers’ rights in the Kaesong Industrial Complex. As a member of the Organisation for Economic Co-operation and Development (OECD), South Korea should also promote the OECD Guidelines for Multinational Enterprises, which asks state members to encourage enterprises to respect basic labor rights guaranteed in core ILO treaties.

“For Kaesong to represent genuine progress for human rights in North Korea, Seoul and Pyongyang alike must ensure basic rights and protections of the North Korean workers,” said Richardson.

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Kaesong cranks out $1000 in goods per worker

Sunday, October 1st, 2006

From Yonhap:
Per capita production at N.K. industrial park passes $1,000 a month in August
10/1/2006

Per capita production at an industrial complex for South Korean companies in North Korea passed US$1,000 a month in August, South Korea’s Unification Ministry said Sunday.

South Korea began financing and building the complex in the North Korean border city of Kaesong in June 2003 as part of its policy of engaging the impoverished communist neighbor.

In August, total production at the Kaesong industrial complex was estimated at $6.8 million, up more than 20 percent from $5.5 million in July, the ministry said.

The Kaesong complex’s per capita production has been on a steady rise. The production was at $937 in the first quarter of this year, up from $758 in the fourth quarter of last year, $444 in the third quarter and $319 in the second quarter, it said.

Fifteen South Korean companies are now operating at the complex, located just north of the demilitarized zone that separates the two Koreas, the Kaesong Industrial District Management Committee said on its Web site, without saying how many North Koreans are working there.

However, the prospects for the Kaesong complex are considered to be grim as the United States is moving to impose additional financial sanctions on the North over its alleged counterfeiting of dollars and other financial irregularities, local newspapers say.

Tensions on the Korean Peninsula have heightened as North Korea tested seven ballistic missiles in July, defying stern warnings from the U.S. and Japan.

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