NORTH KOREA'S APPROACH TO THE WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000100820001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: January 25, 2012
• Sequence Number: 1
• Publication Date: February 6, 1987
• Content Type: MEMO

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DATE /LL
DOC NO /`187 moo~~.
OIR
P $ PD 7
Central Intelligence Agency
Washington. D. C. 20505
DIRECTORATE OF INTELLIGENCE
6 February 1987
North Korea's Approach to the West
Summary
Difficulties in increasing exports to pay for
Western equipment, combined with a dismal credit
repayment record, have hamstrung North Korea's
efforts to increase economic contacts with the
West. In the last three years, few new contracts
have been signed, and- even the number of
negotiations for equipment purchases appear to have
dwindled. Moreover, Western response to the North's
joint venture law has been lackluster.
We expect P'yongyang will fall far short of
importing the more than $1 billion in plant and
equipment it wants from the West. P'yongyang has
been seeking equipment for developing its energy and
mineral resources as well as high-technology goods
such as computers, integrated circuits, and
telecommunications equipment. With help from the
This memorandum was prepared by
Office of East Asian Analysis. Information available as of
6 February 1987 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, Korea
Branch, Northeast Asia Division, OEA,
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USSR and China unlikely to offset these poor
prospects, we see little chance that the North will
be able to boost economic growth much beyond 2 or 3
percent annually over the next several years.
Turning to the West
In early 1984, North Korea renewed its drive for economic
contacts with Western Europe and Japan--which have been limited
since P'yongyang's buying spree in the West in the mid-1970s.
The effort has focused on acquisition of equipment, technology,
and financing. In addition, P'yongyang has introduced a joint
venture law which allows foreign investment in North Korea. The
North has tried to encourage a positive response by a in
several overdue debts to West European creditors.
We believe several factors motivated P'yongyang's approach
to the West:
Perhaps most important were chronic shortages of energy,
material inputs, and means of transportation which were
a drag on industrial development and a constant reminder
of the widening economic gap between North and South
Korea. President Kim I1-song's trip to Eastern Europe
in 1984 probably also highlighted how far the North's
economy lagged those of other Communist nations.
We expect the political importance of economic
development also figured in P'yongyang's decision. Kim
may view a stronger economy as necessary to help
legitimize the succession of his son.
-- A failure to obtain significantly increased economic
support from Communist countries probably helped
convince the North to look beyond traditional trading
partners.
Finally, the example supplied by China's open door
policy may have encouraged P'yongyang to look West.
Serious weaknesses in high-technology areas essential to
long-term growth have dictated much of the North's shopping
list. Although P'yongyang has put out feelers for many types of
plants, equipment, and technology (see inset 1), we believe it
has attached particular importance to high-technology items such
as computers, integrated circuits, and telecommunications
equipment. North Korea has approached companies in several
countries for fiber optics, semiconductor devices and production
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computer equipment, including mainframes,
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Making better use of its natural resources is another goal
that has helped define what the North wants from Western
nations. Energy shortages loom as a major production bottleneck,
while the country's abundant mineral reserves offer potential for
enhanced export earnings. As a result, North Korea has expressed
a strong interest in such items as pipes and equipment for
offshore oil exploration and mining excavation equipment.
P'yongyang has also negotiated for machinery for boosting its
basic industries--such as steel and aluminum--and for increasing
production of consumer goods, notably clothing and television
sets, and agricultural products.
North Korea traditionally has been most active in
approaching Japanese firms but has recently given increased
attention to West European sources, particularly for computers
and telecommunications equipment. It has used both legal and
illegal means in trying to procure equipment.
Pyongyang has actively sought denied US-origin
aircraft, oil equipment, integrated circuits, computers, and
microwave equipment through firms in Japan and Western Europe.
Little Success
P'yongyang's new approach has met with little success. Few
of the many contracts the North has negotiated with Western firms
have been signed, discussions on new business deals have dropped
off, and the joint venture law has attracted little interest.
Nor has P'yongyang's effort to acquire proscribed Western
technology yielded much--the acquisition of Hughes helicopters
The import tally is particularly telling. P'yongyang's
imports from the West--which by 1983 were already 10 percent
below the 1980 level--fell 26 percent in 1984-85 (see figure 1).
1 Preliminary data for the first nine months of 1986 suggest this
downward trend will continue with nominal imports 15 percent
below the level of the same period in 1985. In constant dollar
terms, imports during January-September 1986 were down 40
percent, and we estimate that imports from the West for all of
1986 may have been only about half the 1980 level.
1 Because no North Korean data are available, all of the
statistics on the North's trade with the West are based on
Western reporting.
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Most of the drop in imports from the West in 1981-85 came
from a 34-percent decline in purchases from Japan, which
constitute 73 percent of North Korea's total imports from the
developed West and about 17 percent of imports overall. The
North's other major trading partners in the developed West are
Australia and West Germany, which in 1984-85 together accounted
for 13 percent of the North's imports from the West, and Italy
and France, which made up another 8 percent.
A major portion of the decline in imports during 1984-85 was
a result of a drop in wheat imports--mainly from France--from an
average of 310,000 metric tons a year in 1981-83 to only 17,000
tons a year in 1984-85. Of more significance, however, was the
17 percent decline in imports of machinery and equipment, major
items on the North's shopping list. The sharpest drops in
machinery purchases were in imports of trucks--down 61 percent on
average--and machine tools--down 68 percent. Imports of iron and
steel and pesticides also fell sharply. One bright spot was
imports of construction and mining equipment, which reflect
P'yongyang's emphasis on increasing its output of coal and
The North's high hopes for the joint venture law also have
not been realized. As far as we can determine, only seven
deals--all involved with services rather than production--have
been concluded wih Western countries since the passaqe f the
law in late 1984. Western
participants are encountering a variety of difficulties, which
will continue to discourage other foreign investment (see inset
Weak Purchasing Power
The major stumbling block in North Korea's approach to the
West has been its inability to pay for equipment and
technology. Falling prices for precious metals, a major North
Korean export to the West, have made the problem worse. Exports
to the OECD declined about 20 percent in 1985 and were only about
half the peak level of 1980. Gold and silver--which in most
recent years have accounted for more than half of total exports
to the OECD--have declined especially sharply. Sales of these
2 The North Koreans have used the term "joint venture" rather
loosely. For example, P'yongyang has cited an agreement with
West German firms for the construction of a cement plant as a
joint venture, but the arrangement may in fact be an outright
equipment purchase from the Germans. Even if the West Germans
agreed to take some of the product as partial payment, this would
be a compensation rather than a joint venture arrangement.
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items amounted to nearly $220 million in 1980, but in the
following years averaged less than three-fifths that level.
Sales of silver dropped from a record $107 million in 1980 to
less than $20 million a year. North Korea's earnings from gold
sales--boosted by the doubling of the world market price in
1980--fell precipitatly in 1981 as P'yongyang significantly
reduced the volume of sales in the face of sharply declining
prices (see figure 2). By boosting the quantities exported,
North Korea brought gold earnings back up to over $100 million a
year in 1982-84, but they suffered another decline in 1985 as the
price again fell. Most gold went to West Germany except in 1985,
Sales of lead and zinc, which account for about 15 percent
of P'yongyang's exports to the developed West, have plummeted
since 1980, again because of declines in world prices, but also
because of production shortfalls and attempts to meet export
obligations to the USSR. Average yearly exports of lead and zinc
in 1981-85 were down nearly 80 percent and 35 percent,
respectively, compared with 1980 exports.
North Korea's trade deficits with the developed West
highlight its weak export performance. The cumulative deficit
with the West during 1981-85 was $770 million and with Japan
alone, $835 million. The North has been able to use various
means to cover the imbalance. Sales of gold to West Germany--
which gave the North a cumulative surplus of $370 million--offset
the deficit with other West European countries. We believe funds
from arms exports--mainly to Iran--have largely covered the
deficit with Japan. In addition, P'yongyang may have covered
part of the deficit by skipping payments on short-term credits,
thus unilaterally rolling them over. Finally, gifts of plant and
equipment from the General Association of Korean Residents in
Japan have exceeded $60 million since 1972.
North Korea's failure to expand purchases from the West also
stems from its inability or unwillingness to cover its overdue
debt payments, which has placed it near the bottom of the Western
lenders' creditworthiness list. Despite P'yongyang's attempts to
arrange financing, we know of no Western country that has
extended new medium- or long-term credits to the North since the
mid-1970s. We estimate North Korea's debt to the West at $1.5
billion in current US dollars. Of this, P'yongyang owes:
-- About $455 million to Japan; the $195 million paid by
the Ministry of International Trade and Industry on
insurance claims is now owed to MITI rather than to the
Japanese companies involved.
Roughly $300 million on West European government and/or
government-backed credits.
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-- About $750 million on West European commercial bank
North Korea has few resources to offset its debt. According
to Bank for International Settlements statistics, P'yongyang's
assets in Western banks have averaged only about $100 million in
recent years. The amounts that less developed countries owe the
North for local projects probably are relatively small and, in
Prospects
We believe North Korea will continue to have difficulty in
procuring the equipment and technology it wants from the West.
In the near term, P'yongyang is unlikely to meet with much
success in boosting exports, which is the key to dealing with the
debt problem and generating funds to buy equipment. Given the
production shortfalls we expect to continue for some time, the
North Koreans will remain hard pressed to fill their own needs,
much less to raise exports to both Communist and non-Communist
We estimate that the cost of the large-ticket Western
equipment and technology in which P'yongyang has expressed an
interest would exceed $1 billion over several years--a sum well
beyond the North's financial capabilities. In recent years, for
example, North Korean imports of plant and equipment from the
West have averaged about $165 million, a figure that includes
many small-ticket items. Moreover, joint ventures should remain
unattractive to Western partners.
Economic ties to China and the USSR are unlikely to offset
the North's poor prospects for trade with the West. Despite
improved North Korean-Soviet political ties, we believe the USSR
will continue its tightfisted approach to the North. Since the
mid-1970s, Moscow has pressed P'yongyang to step up exports to
pay off some of its debt obligations as well as to pay for
imports. The 1986-90 trade agreement with the USSR sounds
promising--it calls for a doubling of trade. But we believe the
North cannot boost its exports much more than the 4 percent a
year--in real terms--realized since 1974. The plan to double
trade would 'require an increase of about 17 percent a year if--as
the Soviets are insisting--trade is to be balanced.
The Chinese, like the Soviets, probably will continue to
call for balanced trade and at best will provide only minimal
credits. Tao Bing Wei, head of the
Asian and Pacific Studies Department of the Institute of
International Studies in Beijing, has claimed Chinese leaders are
upset about the North's efforts to repay its debt to the USSR
when it has repeatedly failed to meet obligations to China.
Beijing reportedly has formally rescheduled P'yongyang's debt
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many times over the past few decades.
With its approach to the West failing and Communist trading
partners unlikely to offer much additional help, the North
probably will continue to face severe shortages of energy and
industrial inputs, as well as a lack of know-how. Poor economic
planning, combined with micromanagement by Kim Il-song and his
son, Kim Chong-il, is likely to continue, limiting even the
effectiveness of plants equipped by the West (see inset 3).
Micromanagement by the two Kim's takes the form of (1) ad hoc
directives which set priorities for allocaton of resources and
(2) on-the-spot guidance at individual plants, farms, and
construction sites. This often disrupts production and
interferes with planning. The leadership appears unprepared,
however to make the major changes in economic management needed
for a true take-off of the economy. As a result, we expect
P'yongyang will have to be content with the current sluggish pace
of economic activity. The North probably can realize growth
rates of 2 to 3 percent a year by continuing to make modest
improvements in the infrastructure mainly electric power and
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North Korea's Shopping List
Examples of items in which the North Koreans reportedly have
expressed interest:
Equipment for exploration and exploitation of offshore
and onshore oil.
Coal-fired power plants.
Coal-liquefaction gas plant.
Equipment for coal mining.
Aluminum refinery. .
Lead and zinc refinery.
Steel plant.
Plant to produce magnesite, magnesia clinker, and
firebricks.
Integrated-circuit production plant.
Microelectronics equipment.
Computers.
Telecommunications equipment.
Fiber optics plant.
Plant to produce telephone equipment.
Equipment for production of clothing, toiletries, shoes,
foodstuffs, furniture, and kitchen appliances.
Color TV plant equipment.
Equipment for the manufacture of agricultural machinery
and for processing marine foods.
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Joint Venture Problems
The Nagwon Department Store. This joint venture between
Asahi Sansa (formerly Asahi Shoji Company, Ltd) of Tokyo and the
Mangyong Trade Corporation of North Korea was formed in January
1985. The main branch of the store is in P'yongyang, and 31
branches are planned for major North Korean cities.
are rather discouraged over this project.
Asahi Sansa personnel
Among the problems
- A constant lack of goods in the stores because of
domestic shortages and the failure of the North Koreans
to order expeditiously from Japan the imported goods
needed.
-- The joint venture has not been profitable. Very few
people who visit the stores have the hard currency
required to buy the goods.
-- Communist practices--such as "serve the worker day,"
"study day," and ad hoc party meetings--take
away from retail workers' hours in the store.
Employees have not fully grasped the need to try to
The Hotel in P'yongyang. Shortly after passing its joint
venture law in September 1984, North Korea concluded an agreement
with a French firm, Camenon Barnaul, to build a 45-story hotel in
P'yongyang. In early 1985, the government announced that the
foundation work on the hotel was complete and construction was
progressing as scheduled. By December 1985, however, although
ground had been broken, apparently no work was under way. It is
possible that North Korea's failure to make good on debt
repayments to France cast a pall on the French firm's willin ne
to continue with the hotel.
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FIGURE 1
NORTH KOREA: TRENDS IN TRADE WITH OECD*
EXPORTS
1970 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 1986**
*BOTH EXPORTS AND IMPORTS ARE ON AN F.O.B. BASIS.
**RASED ON DATA FOR THE FIRST HALF OF THE YEAR.
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FIGURE 2
NORTH KOREA'S GOLD SALES
1979?1985
12000 Value of gold sales
1 Volume of gold sales
2000-
5
0 20
1979 1980 1981 1982 1983 1984 1985
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SUBJECT: North Korea's Approach to the West
Distribution:
Original - File
1 - William Clark, Deputy Assistant Secretary for East Asian
and Pacific Affairs, Room 6250, Dept. of State
1 - David L. Blakemore, Director, Office of Korean Affairs
Room 5315, Dept. of State
and Pacific Affairs, Dept. of State
1 - Sherrod McCall, Director, Office of Analysis for East
Asia and Pacific, Room 8840, Dept. of State
1 - Bill Newcomb, INR/EC/CER, Room 8442, Dept. of State
1 - Paul Ray, INR/EAP, Room 8840, Dept. of State
1 - Rear Admiral Edward Baker, Jr., Director, East Asia and Pacific
Region, Room 4C 839, Dept. of Defense
1 - Wallace Knowles, OASD/ISA/EAPR, Room 40840, Dept. of Defense, Pentagon
1 - Col. Smith, Dept. of Army/Foreign Intelligence Division/NE Asia,
Room 2A-474, Pentagon
1 - Maj. Dong, Dept. of Army/Current Intelligence Division/NE Asia,
Room 2B-575, Pentagon
1 - Jay Sloan, Defense Intelligence Officer/EA/P, Room 2C238,
Defense Intelligence Agency
1 - DB-2D, Room C 2951, DIN 25X1
1 _F DE-2, Room B6823, DIA 25X1
1 - JSI-3C, Room 1C930, DIA 25X1
1 - Col. Ned Murata, DOD/OJCS/J-5/Northeast Asia, Dept. of Defense,
Room 2E-973, Pentagon
1 - Director for Foreign Intelligence, 25X1
Room B7900, DIA
1 - Byron L. Jackson, Office of Intelligence Liaison
Room 6854, Dept. of Commerce
1 - Doug Mulholland, Office of the Special Assistant to the
Secretary for National Security, Room 4324, Dept. of Treasury
1 - Director, DCI/DDCI/Executive Staff (7E-12)
1 - NIO/EA (7E 62)
1 - NIO/Economics (7E 48)
1 - C/ /DO (3D 01) 25X1
1 - C/EA/ 5E 18) 25X1
1 - OGI/FSIC/PI (2G 18)
1 - OEA/NEA/Korea Branch (4G 43)
1 - OEA/NEA/Japan Branch (4G 31)
1 - OEA/NEA/STI Branch (4G 43)
1 - OEA/NEA Division (4G 43)
1 - OEA/China Division (4G 32)
1 - OEA/SEA Division (4F 24)
1 - D/OEA (4F 18)
1 - C/Production/OEA (4G 48)
1 - FBIS Analysis Group (1014 Key Bldg.)
1 - DDI (7E 47)
1 - Senior Review Panel (5G 00)
1 Office of Legislative Liaison (7B 14)
1 - PDB Staff (7F 30)
5 - CPAS/IMC/CB (7G 07)
1 - CPAS/ILS (7G 50)
1 - LDA (1H10)
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1 - C/PES (7F 24)
1 - NIC/AG (7E 47)
1 - DUO/EA Division (5D 00)
1 -
1 -
1 -
1 -
DDO/EA
DDI/0EA/NEA/Korea/STI
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28 January 1987 25X1
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