NORTHEAST ASIA PEACE AND SECURITY NETWORK ***** SPECIAL REPORT ***** The following “DPRK Report” is the product of a joint project between the Center for Nonproliferation Studies (Monterey Institute of International Studies, Monterey, California, USA) and the Center for Contemporary International Problems (ICIP) (located at the Diplomatic Academy, Moscow, Russia). It is funded by a grant from the Rockefeller Foundation and is written by Russian analysts associated with the ICIP.] ----------------------------------------------------------- THE DPRK REPORT, No. 11 (January-February 1998) Contents of this report 1. Developments in the Rajin-Sonbong Free Economic Zone. 2. North Korea’s Participation in the Winter Olympics in Nagano, Japan 3. The Deepening of the North Korean Economic and Social Crisis 1. Developments in the Rajin-Sonbong Free Economic Zone. North Korea remains in a deep economic crisis and yet, for political reasons, its leadership still refuses to implement serious reforms. As a result, with economic problems continuing to pile up, Pyongyang is considering the development of free trade and economic zones (FTEZs) as one way out of its current dilemma. The purpose of these zones, as some North Korean officials stress in private conversations, is to serve as “locomotives for pulling the socialist economy out of its current crisis” without necessitating fundamental reforms. The biggest of these zones is the Rajin-Sonbong area, located on the northeast coast of North Korea near the Russian border. The decree to establish the Rajin-Sonbong zone was adopted by the Administrative Council of the DPRK on December 28, 1991. Since then, over 50 laws and regulations have been introduced to cover various legal aspects governing activities within the zone. Subsequent decisions have also increased the size of the zone from 621 to 724 square kilometers. The port of Ch’onjin, which technically lies outside the zone’s territory, has been nevertheless included into the Rajin-Sonbong FTEZ’s jurisdiction. However, despite all these efforts, Pyongyang has not succeeded in attracting sizeable foreign investments into the zone. Currently available data show that the poorest record is in the sphere of productive enterprises, which are crucial to the zone’s long-term success. As of March 1, 1998, contracts have been signed for 65 projects. Their total value is US$907.1 million. Letters of intent have been signed for US$2.02 billion. These prospective deals include companies from Austria, Denmark, Finland, France, Germany, Great Britain, Hong Kong, Italy, Japan, the Netherlands, Sweden, Thailand, and the United States. But the volume of funds actually committed to date is only US$35.1 million, which includes US$14 million for infrastructure development, US$12 million in the service sector, US$7.6 in the financial sector, US$1 million in the tourist sector, and only US$500,000 in productive enterprises. At this point, the following projects have begun within the zone: a cargo terminal for fertilizers at Pier 1 in the port of Rajin with a capacity of one million tons per year; a crane for moving containers up to 110 tons in the Rajin port; a project to electrify the railroad between Hoeryong and Haksong (68 kilometers); the reconstruction and widening (to 12 meters) of the Rajin-Sonbong road (16 km), the Sonbong-Wojong-ri road (16 km), and other roads with a total length of 100 km; the laying of a fiber optic cable from Pyongyang to Rajin; the installation of a telephone switching station with 5,000 lines; the construction of an international hotel in Rajin with 200 beds and a tourist hotel in Pipha with 600 beds; the building of helicopter pad; and the construction of a bridge over the Tumen River at Wonchon. A planned bank joining North Korea’s Daesong Bank and the Peregrine Investment Company (Hong Kong) was initially capitalized with a foreign share of US$15 million, but its fate is now in doubt due to Peregrine’s recent bankruptcy. In order to stimulate investments and to receive additional funds, North Korea undertook the unprecedented move last year of signing a contract to lease the entire territory of the Rajin- Sonbong free trade and economic zone to the Russian company Kontsern–Industriya for 50 years. The Russian company was supposed to locate prospective firms interested in sub-leasing property within the zone. However, the failure of foreign companies to come forward led the Russian firm to default on its end of the deal, which has now been nullified by the North Korean side. To date, it is worth noting that not even Russian companies have invested in the Rajin-Sonbong FTEZ. In June 1997, the Administrative Council of the DPRK made a decision to create free trade zones for the duty-free processing of imported raw materials in Wonsan and Namp’o, as well as to establish the Tanch’on special mining zone. Actual work to implement these decisions has not yet started. Currently, North Korean authorities are also examining the possibility of creating FTEZs in the cities of Sinuiju (on the Chinese border) and Haeju. 2. North Korea’s Participation in the Winter Olympics in Nagano, Japan North Korean authorities decided to participate in the 1998 Winter Olympics in Nagano for a number of reasons. First, they wanted to project to the international community an image of the DPRK as at least a "normal" state, rather than the popular media image of one that is on the verge of collapse. Second, Pyongyang viewed North Korean participation in the Olympics as a counterbalance to Seoul's alleged efforts to use the games for international propagandistic aims. Third, from the point of view of Pyongyang, the presence of North Korean athletes in Nagano could also boost the morale of the population back home. Finally, North Korean authorities believed that official representatives attending the games along with the athletes could promote useful ties with their foreign counterparts to further Pyongyang’s political and economic interests. All these goals, it was estimated, would be more successfully realized if North Korean athletes performed well in the games. Authorities counted on at least two medals in Nagano and hoped that the Northern squad would be ahead of the Southern one in overall medals. Such hopes, however, failed to materialize. Instead, South Korea won five medals (including three gold) while North Korean athletes did not come away with any medals. Representatives of the North Korean sports federation explained to the outside world that their country’s poor performance was due to the low quality of its equipment, including its lack of recently developed (so-called "clap") skates for speed skating. These officials admitted that their country simply did not have money to acquire the kind of advanced equipment that other competitors in the games possessed. Internally, North Korean authorities nevertheless presented the performance of their country’s athletes as "outstanding" and even "glorious." The so-called "achievements" were interpreted as the result of "very high morale and loyalty of our athletes to the great leader" and as a reflection of the "true juche spirit." At the same time, official state propaganda stressed that the achievements of North Korean athletes would have been even more substantial if were not for the tricks of "corrupt officials and judges" at the Nagano games. All in all, however, the leadership in Pyongyang has not been visibly distressed with the outcome of the 1998 Winter Olympics. As a high-ranking North Korean diplomat pointed out in a recent conversation, "The DPRK has much more serious concerns than sports competitions." According to available information, no one was punished for the worse-than-expected performance of North Korean athletes in Nagano. The DPRK, it seems, will continue to participate in major sports events pursuing its usual political and propagandistic goals. 3. The Deepening of the North Korean Economic and Social Crisis Estimates by Russian experts show that the economic and social situation in the DPRK is getting worse and worse. The most acute problem is the shortage of grain. North Korean authorities admit that in March 1998 each adult will receive only 100 grams of corn per day (compared to 300 grams since January 1997). This quota constitutes only one-eighth of the calories necessary for a healthy adult. Even those who work under especially difficult conditions (for example, miners and fishermen) receive a mere 200 grams of corn. Workers in the metallurgical industry are being allocated only 180 grams, while soldiers are given 170 grams. In addition to corn, all workers and employees have been reduced to only 100 grams of vegetable oil per month (versus 200 grams previously), 150 grams of meat (previously 250), three eggs (previously 10), three kilograms of dried fish (previously six), and three kilograms of kimchi cabbage (previously eight). The performance of industry has been equally disastrous in recent months. Experts estimate that gross industrial output continues to decline by two to three percent each month. The situation is especially grave in regards to the production of electrical power, coal, steel, and non-ferrous metals. Compared to the 21 billion kilowatt/hours of electricity produced in 1997, this year the figure could fall to below 19 billion kilowatt/hours. The production of coal may drop from 33 to 30 million tons, steel from 2.4 to 2.1 million tons, and non-ferrous metals from 0.2 to 0.1 million tons. These data show that the North Korean economy has not yet "bottomed out" and that further decline may be expected. It is too early to assume, however, that popular unrest will follow from these conditions. Individual actions must always be considered not based on Western assumptions, but instead from within the unique political and psychological context of the DPRK.