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Cablegate: North Korea Economic Briefing - June 2008

R 012334Z JUL 08
FM AMEMBASSY SEOUL
TO SECSTATE WASHDC 0691
USDOC WASHDC 7171
DEPT OF TREASURY WASHDC
DEPT OF AGRICULTURE WASHDC
DEPT OF ENERGY WASHDC
DEPT OF HHS WASHDC
WHITE HOUSE WASHDC
AMEMBASSY TOKYO
AMEMBASSY BEIJING
AMEMBASSY SINGAPORE
AMCONSUL HONG KONG
AMCONSUL SHENYANG
AMCONSUL VLADIVOSTOK
AIT TAIPEI 2741

UNCLAS SEOUL 001319

E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG ETRD SENV SOCI KS KN
SUBJECT: NORTH KOREA ECONOMIC BRIEFING - June 2008

-------------
In This Issue
-------------

Domestic Economy
----------------

-- DPRK Welcomes U.S. Delisting
-- DPRK Economy Contracts 2.3 Percent in 2007
-- ROK NGO Quotes DPRK Document on Food Shortages
-- Sensationalist DPRK Commercial Lures Foreign Customers
-- DPRK Promotes English Language Teaching

Foreign Aid
-----------

-- Six-Party Countries Agree to Accelerate DPRK Energy Aid -
Following a Six-Party Meeting
-- Korean-American Religious Group Builds General Hospital
in DPRK
-- Russia Sends Food Aid to DPRK via WFP
-- Italy Contributes 500,000 Euros to Relieve DPRK Food
Shortage
-- WHO and FAO to Launch Anti-Epidemic Measures against DPRK
Bird Flu
-- DPRK Requests WMO High-Tech Weather Equipment

Inter-Korean Economic Cooperation
---------------------------------

-- May 2008 Inter-Korean Trade Up 14 Percent
-- New Inter-Korean Economic Cooperation Projects Decline
-- North Limits Passage to Kaesong Industrial Complex
-- MOU Plans to Foster DPRK Human Resources
-- ROK Legislator Proposes Another Inter-Korean Economic
Zone in ROK
-- POSCO to Buy DPRK Coal and Iron Ore
-- HAC delays Mount Baekdu Tour
-- Inter-Korean JV Textile Firm to Begin Production in
August
-- ROK City Government Builds Bread Factory in Pyongyang
-- South NGO Sends Food Aid to North

Foreign Trade and Investment
----------------------------

-- Japan Partially Lifts Sanctions on DPRK
-- DPRK to Export Magnesium Oxide to Taiwan
-- DPRK-Taiwan Trade Rises 15.5 Percent in 1st Quarter of
2008
-- DPRK-China Reportedly in Joint Development of DPRK Iron
Ore Mine
-- DPRK Dispatches Workers to Poland to Earn Cash
-- Dutch Travel Agency Promotes DPRK Tour

----------------
Domestic Economy
----------------

DPRK Welcomes U.S. Delisting
----------------------------

North Korea's Central News Agency (KCNA) quoted a DPRK
Foreign Ministry spokesman on June 27 stating that the
United States government had announced plans to delist North
Korea from its State-Sponsored Terrorism List and Trading
with the Enemy Act on June 26. The North Korean government
hailed the U.S. decision as a positive measure. The
spokesman noted that the North Korean government will
sincerely implement the September 19th Joint Statement,
closely hewing to the principle of "action for action" in
the future.

DPRK Economy Contracts 2.3 Percent in 2007
------------------------------------------

The DPRK economy contracted 2.3 percent in 2007, down for a
second consecutive year after falling 1.1 percent in 2006,
according to a June 18 report by Bank of Korea (BOK). The
BOK estimates that the South's economic output is now 36
times as large as the DPRK's. The BOK attributed the DPRK's
negative growth to (1) international isolation stemming from

its nuclear weapons program and (2) reduced agriculture
output due to unfavorable weather conditions. Agriculture
output posted a significant 9.4 percent drop in 2007, while
services improved slightly, mainly due to increased tourist
earnings from South Korean visits. Manufacturing output
rose 0.7 percent, with increased apparel and footwear
production stemming from the Kaesong Industrial Complex
(KIC) and inter-Korean cooperation projects. However, light
industry declined 1.7 percent, mainly due to lower food,
beverages, and cigarette production. Construction dropped
1.5 percent, contributing to further deterioration in the
DPRK's already poor infrastructure. Overall mining output
grew a slight 0.4 percent, chiefly due to lower production
of coal and non-metal minerals canceling out higher iron ore
and tungsten production. The following graph compares
annual growth rates for the two Koreas:


ROK NGO Quotes DPRK Document on Food Shortages
--------------------------------------------- -

A document released by the North Korean government indicates
North Korea is facing grave food shortages, according to
Good Friends, a South Korean NGO on June 18. The document
stated, "Resolving today's food problem is very important
for preserving the socialism of our own style and improving
the living standards of the North Korean people." It also
calls for redoubling North Korean efforts to increase this
year's crop production.

Sensationalist DPRK Commercial Lures Foreign Customers
-------------------------- ---------------------------

Chosun Ilbo, a South Korea-based daily, reported June 9 that
a sensationalist commercial advertisement for game software
was recently posted on the Chosu Expo, a DPRK-run internet
shopping mall (www.chosunexpo.com). The shopping mall sells
tea, health food, liquor, software games, and flatware, with
commercial advertisements posted in English, Chinese, and
Korean. The commercial advertisement depicted a female
volley ball player dressed in a bikini. The Internet
shopping mall was reportedly open in November 2004 to offer
business consulting services similar to those of South
Korea's Trade and Investment Promotion Agency (KOTRA).

DPRK Promotes English Language Teaching
---------------------------------------

North Korea is promoting English-language education
throughout the country to help revive the economy, according
to a recent KOTRA report. North Korean authorities are
reportedly considering establishing an English language
center to train English teachers in cooperation with a
Canadian NGO. Moreover, North Korean authorities are
planning to introduce early English education courses in
3rd-grade elementary schools beginning this September.
Global Aid Network, a Canada-based non-governmental
organization, is currently recruiting English teachers to
dispatch to Pyongyang's English language center on one-year
assignments. The two countries had operated a Canada-DPRK
Science and Technology English Education Center for North
Korean science and technology engineers in 2004, but it was
suspended in 2005.

-----------
Foreign Aid
-----------

Six-Party Countries Agree to Accelerate DPRK Energy Aid
Following a Six-Party Meeting
---------------------------- --------------------------

South Korea's Foreign Ministry (MOFAT) Spokesman Hwang Joon-
kuk said June 11 that South Korea, the United States, Japan,
China and Russia had agreed to speed up the delivery of
energy aid to North Korea in exchange for its progress
towards nuclear disablement. The Energy and Economy Working
Group meeting was held at the truce village of Panmoonjeom
on June 10-11. Hwang said the five donor countries have so
far sent North Korea 384,000 tons of oil and other energy-
related equipment out of the promised 1 million tons.


Korean-American Religious Group Builds General Hospital in
DPRK
---------------------------- -----------------------------

Manna Missionary, a Houston-based Korean-American religious
group, recently opened Sinheung General Hospital in Rajin,
North Korea, according to Voice of America (VOA)on June 19.
The hospital can accommodate 100 North Korean patients and
is equipped with high-tech medical devices. The majority of
medical doctors at the hospital consists of retired Korean-
American medical doctors rotating in 2~3 months stints.
Manna Missionary also assisted North Korea in setting up a
bread factory in 1999 and a medical center in 2003. It
also plans to train North Korean medical doctors.


Russia Sends Food Aid to DPRK via WFP
-------------------------------------

Russia's Foreign Ministry recently announced that the
Russian government had shipped 2,860 metric tons of wheat
flour to North Korea via the World Food Program (WFP) on
June 11.


Italy Contributes 500,000 Euros to Relieve DPRK Food
Shortage
-------------------------- -------------------------

The VOA cited Italy's Foreign Ministry on June 20 stating
that the Italian government had donated 500,000 euros (USD
790,000) in cash to the WFP for food aid to the DPRK. In
addition, the Italian government recently shipped 1,300
metric tons of wheat flour to the DPRK via the WFP and
pledged to contribute an additional one million euros (USD
1.58 million) to assist the DPRK in the near future.


WHO and FAO to Launch Anti-Epidemic Measures against DPRK
Bird Flu
---------------------------- ----------------------------

Radio Free Asia (RFA) quoted the United Nations Food and
Agriculture Organization (FAO) stating that it plans to
launch a joint-venture project to prevent bird flu outbreaks
in North Korea in cooperation with the World Health
Organization (WHO). The joint project will run from July
through December of this year. Details of the project were
not disclosed. Earlier in the month, Good Neighbors, a
South Korea-based NGO, claimed it had observed bird flu
cases in the North. North Korean authorities strongly
denied the rumor. So far, no outbreak has been confirmed.


DPRK Requests WMO High-Tech Weather Equipment
---------------------------------------------

The North Korean government has asked the World
Meteorological Organization (WMO) to supply high-tech
weather-observation devices to help forecast rainfall and
prevent crop damage, according to the RFA on June 18. RFA
quoted Dr. Tokiyoshi Yoya stating tat the WMO is
considering how to support such a request.

---------------------------------
Inter-Korean Economic Cooperation
---------------------------------

May 2008 Inter-Korean Trade Up 14 Percent
-----------------------------------------

Inter-Korean trade rose 14 percent to USD 173 million this
May compared to the same month last year, according to MOU.
The increase was largely due to commercial transactions,
reaching USD 153 million, up 46 percent from USD 105 million
last May. Non-commercial transactions between the two
Koreas contracted significantly due to strained inter-Korean
political ties, shrinking 58 percent to USD 19.6 million.
South Korea's exports to the North grew 8 percent to USD
95.5 million in May, while the imports were up 22 percent to
USD 77.2 million. In the meantime, inter-Korean trade grew
30.4 percent to USD 734.3 million in the first five months
of 2008 compared to the same period a year ago. South
Korea's exports to North Korea rose 27.6 percent to USD 376

million, while imports from North Korea grew 33.6 percent to
USD 358 million.


New Inter-Korean Economic Cooperation Projects Decline
------------------------ -----------------------------

The number of inter-Korean economic cooperation
consultations have steadily declined since the new South
Korean government assumed office in late February, according
to MOU figures. The number of business consultations (held
under the auspices of the Inter-Korean Economic Cooperation
Consultation Office set up in the Kaesong Industrial
Complex) fell 29 percent in the first five months of this
year compared to the same period of a year ago. MOU noted
that lack of government level communications between the two
Koreas accounted for the decline.


North Limits Passage to Kaesong Industrial Complex
--------------------------------------------- -----

Beginning on June 24, North Korean authorities restricted
the passage of South Korean citizens and goods from the
Kaesong Industrial Complex to South Korea to afternoons
only. The DPRK spokesman cited by Yonhap explained, "North
Korea has been allowing South Koreans to transport goods
only during the afternoon period because transport
connections necessary to manage cross-border passage are too
old."


MOU Plans to Foster DPRK Human Resources
----------------------------------------

A Ministry of Unification (MOU) official said June 18 that
it plans to propose a comprehensive plan for fostering North
Korean human resources to respond to expanded inter-Korean
economic cooperation. The program will include economic and
technical training.


ROK Legislator Proposes Another Inter-Korean Economic Zone
in ROK
---------------------------- -----------------------------

A South Korean legislator (and one of the ruling party's
policy makers) Yim Chae-hee, is proposing a bill to
establish an economic zone at Paju in northwest South Korea
to help facilitate inter-Korean economic cooperation. North
Korean workers would be invited to work at the South Korean
free economic zone, whose size and function will be similar
to that of the Kaesong Industrial Complex. North Korea has
yet to respond to the South's proposal. Yim said that his
bill would help North Korea chart a successful economic
transition. "North Koreans can gradually learn lessons from
the capitalist economy through the collaboration project,"
he said.


POSCO to Buy DPRK Coal and Iron Ore
-----------------------------------

POSCO-China Holding Corporation President Kim Dong-hyun
visited Pyongyang June 24 at the invitation of North Korea's
National Economic Cooperation Federation, a North Korean
agency responsible for international economic cooperation,
to discuss the purchase of anthracite coal. POSCO bought
200,000 tons of coal from North Korea last year and is
considering purchasing more coal this year. POSCO also
reportedly discussed the possibility of buying iron ore from
the North. A POSCO official stated, "POSCO did not import
North Korean iron ore in the past because its iron content
was relatively low. As a result of soaring commodity
prices, however, the company is now considering buying North
Korean ore."


HAC delays Mount Baekdu Tour
----------------------------

Hyundai Asan Corporation (HAC), the South Korean tour
operator of Mount Geumgang resport in the DPRK, said June 12
that it has decided to postpone its Mount Baekdu program
into next year due to stalled inter-Korean governmental
relations. HAC will instead focus on its existing tour
programs to Mount Geumgang and Kaesong City. HAC conducted
a Baekdu site survey last November, but key details on
airport renovation, flight routes, and airlines have yet to
be worked out.


Inter-Korean JV Textile Firm to Begin Production in August
----------------------------- ----------------------------

Pyongyang Hemp Textiles (PHT - a joint-venture between South
Korea's Andong Hemp Textiles and North Korea's Saebyeol
General Company) plans to begin producing goods (socks,
towels, sheets and textiles) this August, according to a
company representative on June 5 PHT was initially
capitalized at USD 30 million -- USD 15 million in capital
from the South Korean firm and the remaining USD 15 million
in hemp fields and factory land located around Pyongyang,
North Korea. The PHT representative said that a total of
1,800 North Korean workers and 25 South Korean managers and
technicians will participate in the venture.


ROK City Government Builds Bread Factory in Pyongyang
--------------------------------------------- --------

A South Korean delegation led by Mokpo City government
leader Jung Jong-deuk visited Pyongyang May 31 to attend the
ground-breaking ceremony of a bread factory in Pyongyang in
cooperation with North Korea's National Reconciliation
Committee. The Mokpo City government contributed USD
574,000 to finance the construction of the two-story
factory, expected to be completed in September of this year.
Upon completion, the factory will be able to provide 10,000
North Korean children with bread and cookies per day.


South NGO Sends Food Aid to North
---------------------------------

On June 18, Good Neighbors sent USD 95,700 worth of food aid
consisting of milk powder, wheat flour and vegetable oil to
families in Nampo and Gangnam County near Pyongyang. Good
Neighbors has also been helping North Korea to refurbish
hospitals.


----------------------------
Foreign Trade and Investment
----------------------------

Japan Partially Lifts Sanctions on DPRK
---------------------------------------

Japanese Foreign Minister Masahiko Komura announced June 14
that the Japanese government had agreed to lift restrictions
on the movement of people between the two countries and to
end a ban on chartered flights from North Korea. In
return, North Korea agreed to cooperate in the investigation
of the 1970 hijacking of a Japanese aircraft flown to North
Korea.


DPRK to Export Magnesium Oxide to Taiwan
----------------------------------------

Formosa Plastics Group, a leading Taiwan-based petrochemical
company, plans to import 1,500 tons of magnesium oxide from
North Korea, according to KOTRA on June 5. North Korea
holds the world's 3rd largest magnesium oxide reserves,
followed by China and Russia. Formosa Plastics plans to
expand its imports of magnesium oxide from North Korea,
diversifying away from its main supplier, China.


DPRK-Taiwan Trade Rises 15.5 Percent in 1st Quarter of 2008
--------------------------- -------------------------------

North Korea's trade with Taiwan rose 15.5 percent to USD 5.2
million in the first quarter of this year, according to
KOTRA. North Korea's exports to Taiwan skyrocketed 2,039
percent to USD 1.2 million (mainly coal and electric
circuits), while imports from Taiwan fell 10 percent to USD
4 million (chiefly chemicals and soybeans).


DPRK-China Reportedly in Joint Development of DPRK Iron Ore
Mine
---------------------------- ------------------------------

Yonhap News Agency cited a Chinese source saying that North
Korea and China are jointly developing North Korea's Ongjin
Iron Ore Mine. S group, a China-based magnesium processing
firm, in conjunction with DPRK authorities recently set up
the West-Sea Joint Venture Company with a total capital of
36 million euros (USD 57 million) to develop the iron ore
mine. The joint venture firm will expand its business into
the construction of a thermal power plant, steel mill, and
port facility in North Korea. The Ongjin iron ore mine is
estimated to hold a iron ore reserve of 600 million tons.


DPRK Dispatches Workers to Poland to Earn Cash
--------------------------------------------- -

RFA cited a Poland-based daily, Gazeta Wyvorcza, on June 3
stating that North Korean authorities had dispatched
approximately 42 North Korean workers to the Gdansk shipyard
and Kleczaanow farms in Poland's northwest to earn foreign
currency.


Dutch Travel Agency Promotes DPRK Tour
--------------------------------------

Koning Aap, a Dutch-based travel agency, has been promoting
a 15-day North Korean tour program priced at 2, 850 Euros
(USD 4,471) per person. The tour program includes
Pyongyang, Kaesong, Panmujeom, Mount Myohyang, Nampo, and
Inner Mount Geumgang. The company is considering offering
more tour programs to North Korea.


VERSHBOW

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