North Korean Economy Watch

UNFAO
10/30/2003

Despite better harvests this year, the Democratic People’s Republic of Korea (North Korea) will have another substantial food deficit in 2004, requiring a large amount of external assistance, two United Nations agencies said today.

A combination of insufficient domestic production, the narrow and inadequate diet of much of the population and growing disparities in access to food as the purchasing power of many households declines, means that some 6.5 million vulnerable North Koreans will require assistance next year, according to a joint report by the UN Food and Agriculture Organization (FAO) and World Food Programme (WFP).

The situation remains “especially precarious” for young children, pregnant and nursing women and many elderly people, the Rome-based agencies warned.

The report projected domestic cereal availability in the 2003/04 marketing season (November-October) at 4.16 million tonnes, 4.7 per cent up from the revised 2002/03 estimate of 3.97 million tonnes.

The 2003 rice and maize harvests each rose by an estimated 4.5 per cent over 2002, to 1.48 million tonnes (milled basis) and 1.73 million tonnes respectively. The improvements were attributed to favourable weather, a relatively low incidence of crop pests and diseases, increased application of donated fertilizer andbetter irrigation.

Forecasting total cereal needs – food, animal feed and seeds – for 2003/04 at 5.1 million tonnes, the FAO/WFP report projected an import requirement of 944,000 tonnes. Given anticipated commercial imports of 100,000 tonnes, concessional imports of 300,000 tonnes, and food aid expected to be in stock or to arrive after 1 November, 2003 of 140,000 tonnes, the uncovered gap will be 404,000 tonnes.

Despite evidence of improved nutritional levels in recent years, malnutrition rates remain “alarmingly high”, the report said. Four out of ten young children suffer from chronic malnutrition, or stunting, according to a large-scale, random sample survey conducted in October 2002 by UNICEF and WFP. Continued, targeted food aid interventions are essential to prevent a slippage back towards previous, higher levels of malnutrition, the UN agencies said.

The economic policy adjustment process initiated in July 2002 has led to many factories being unable to pay full wages. Combined with food price increases that were higher than increases in wages, this has caused a further deterioration in the already inadequate purchasing power of many households, especially in urban areas.

Rations from the Public Distribution System (PDS) – a primary source of food for the 70 per cent of North Korea’s 23 million people living in urban areas- are set to decline to no more than 300 grams per person per day in 2004, from 319 grams this year, according to government authorities. The present allocation ensures only half of an individual’s caloric requirements.

Low as the PDS rations may be, industrial workers and elderly people now spend up to 60 per cent of their income on these rations alone. After paying for non-food necessities, they can ill-afford staples such as rice and maize in private markets, where prices are as much as 3.5 times higher, let alone more nutritious foods.

As the situation may worsen in the immediate future, the report recommended that attention also be given to the low-income PDS dependents in urban areas rendered increasingly under-employed by economic adjustment process.

The FAO/WFP report urged that 484,000 tonnes of commodities, including 400,000 tonnes of cereals, be sought as food aid for 2004 for the most vulnerable North Koreans. Three-quarters of the total is earmarked for children in nurseries, kindergartens, primary schools, orphanages and hospitals, pregnant and nursing women and elderly people.

Despite improvements in the operating environment for aid agencies, the report noted that there are still restrictions on access to the needy and to marketsand shops, reducing the scope for monitoring and the timely detection of newly emerging food-insecure groups. But it also says that the North Korean government has been more forthcoming with information needed to assess household food security.

The report recommended that “in addition to providing urgently needed food aid, the international community enter with the government into a policy dialogue to set an enabling framework to mobilise the economic, financial and other assistance needed to promote sustainable food production and overall food security.”

Joong Ang Ilbo
1/27/2007

Washington said Thursday it will withhold all contributions to the United Nations Development Program (UNDP), an agency accused of mismanaging its North Korea activities that led to a large, steady influx of cash into a regime suspected of seeking nuclear weapons.

The United States would also consider proposing that the UN stop all programs in the North except those for humanitarian assistance, said Ambassador Alejandro Wolff, acting U.S. envoy to the United Nations. He said the U.S. was satisfied with UNDP’s announcement of steps to remedy the situation, including an audit and readjustment of its 2007-2009 North Korea program.

“In the meantime, until we get the results of that audit and the program is reviewed, we would defer approval of the new program for the DPRK.,” the envoy said. “The U.S. also withholds its contribution in part to UNDP to the DPRK program,” he said. DPRK stands for Democratic People’s Republic of Korea, North Korea’s official name.

Japan went further, its envoy suggesting the UN stop all programs in North Korea except for direct humanitarian aid. Mr. Wolff said the Japanese argument “is quite compelling” and added the U.S. will consider the proposal.

At the State Department, spokesman Sean McCormack denied that the UNDP probe is targeted at Pyongyang. “This is not a U.S.-North Korea issue,” Mr. McCormack told reporters. “This is not directed at North Korea. This is simply an issue of management and oversight of UN programs. The secretary-general and executive director of UNDP understand it as such.”

The UNDP has been accused by Washington of mismanaging its aid in North Korea, resulting in a massive cash flow into the Pyongyang regime through hard currency payments to the North Korean government and local employees and vendors.

Ban Ki-moon, the new UN leader, asked for an overall audit of all UN funds and programs, starting with the first report on North Korea to be completed within 90 days.

Pyongyang in a statement claimed strict conformity with UN regulations.

Korea Times
1/26/2007

The number of undernourished people in North Korea has more than doubled over the past decade with a diminishing dietary energy supply despite the country’s increased food production, the Yonhap News Agency said Friday citing a Food and Agriculture Organization (FAO) report.

FAO said in its annual report in Rome on Wednesday that it estimated the number of undernourished in North Korea at 7.9 million for 2001-2003, more than twice as many as the 3.6 million recorded for 1990-1992.

The dietary energy supply, measured in daily calorie intake per person, dropped to 2,150 in 2001-2003 from 2,470 in 1990-1992, marking a 1.25 percent decrease, according to the report.

The proportion of undernourished subsequently grew from 18 percent of the total population to 35 percent, the report said.

North Korea’s per capita food production, however, was growing at an annual average of 1.9 percent during the 1996-2005 period, compared to a drop of 1.8 percent from 1986 to 1995.

Yonhap, a semiofficial South Korean news agency, quoted the report as saying that the North exported $22 million worth of agricultural products in 2002-2004, accounting for 2 percent of the country’s total exports.

The figures compare with $354 million in agricultural imports during the same years, representing 17.1 percent of North Korea’s total imports.

Plagued by repeated floods and droughts, North Korea subsisted on international food donations for nearly a decade from the mid-1990s. But the U.N. World Food Program (WFP), the main coordinator of the donations, was told to leave the country, which claimed it was producing a bumper crop and receiving aid outside of the U.N. relief agency.

The WFP curtailed much of its presence and activities in the North last year as a result.

Yonhap quoted FAO’s report as stating that North Korea has been the biggest recipient of food aid in recent years and still receives more than 1.1 million tons of grain equivalents per year on average. This equaled 31 percent of the country’s total cereal production in 2002 and 22 percent in 2003.

The report said the number of undernourished in South Korea stayed the same at 800,000 in 1990-1992 and 2001-2003, with the dietary energy supply increasing 0.12 percent between the two periods.

Korea Times
Na Jeong-ju
1/26/2007

If at least one member of a North Korean household moves to South Korea after reunification, more than 3 million from the North may head south if the two Koreas are reunited, the Bank of Korea (BOK) said Friday.

According to the BOK’s Institute of Finance and Economy, if such an exodus takes place in North Korea after reunification, the South may face serious economic consequences, the report said.

If Koreas adopt a German model, in which West Germany extended financial support to East Germany before and after reunification, South Korea would shoulder a total of $500-$900 billion in reunification costs. If the money is spent appropriately, it will take 22-39 years for North Korea to top $10,000 in gross national income, the report said.

The institute proposed South and North Korea try to reduce economic gap through economic cooperation programs. If the South supports the North through development programs, using its capital and the North’s cheap labor, it can reduce reunification costs considerably, it said.

“It is desirable for the two Koreas to designate special economic zones to reduce their economic gap and conduct programs to develop the North Korean economy,’’ the report said.

With the development programs, the South can spend much less than adopting the German model, the report said. The reunification costs will be cut to $300-500 billion, while the period for North Korea to see a GNI of $10,000 will be shortened to 13-22 years, it added.

Yonhap
1/25/2007

The U.N. Development Program (UNDP), recently accused of unmonitored activities in Pyongyang that led to a large, unintended influx of cash to the regime there, announced Thursday that it will adjust the North Korea program and delay its implementation until approved.

But the US$17.91 million resource allocation made in the original 2007-2009 program will be maintained, it said.

Daily NK
Kwon Jeong Hyun
1/25/2007

Since last year, North Korean authorities have been attempting to cut off all kinds of capitalist culture. Hence, another extensive hunt for Korean videos and radio broadcasts continues on.

North Korean authorities formed “109 Inspection Team” consisting of authority officials, inspectors from the National Safety Agency and Social Safety Agency, who have been focusing on regulating the major cities for watching and selling foreign VCDs. As of this year, the regions for inspection has extended to the provinces, an inside source informed. The regulations seem to have become an annual event.

The source from North Korea said “About 50 people who were caught watching foreign videos in the district of Woonsan, North Pyongan and now are being investigated” and “The preliminary hearing for about 10 people with no connections or who could not offer bribes, also the people found to be directly circulating the videos has ended and are now waiting a sentence.”

During the 80’s, video tapes were controlled by intercepting with electricity and any family found with videos in their video players were individually restrained. However, many families with video players also had chargers and so this method was ineffective. Now inspector groups consisting of 10~20 people have search warrants to thoroughly check all parts of the home.

The source said “The people sentenced will probably get sent to the labor training corps but of these repeaters if any person has issues with ideologies or are condemned as responsible for selling the videos, then they will be sentenced to jail.” The source added “People who are sentenced to jail because of videos are normally imprisoned for 4~5 years, but many are released after 2~3 years on special occasions like Feb 16th (Kim Jong Il’s birthday) or April 15th (Kim Il Sung’s birthday).”

On a different note, the latest issue of Democratic Chosun (issued on January 13), the government paper, obtained on the 20th stated “Imperial activists are sticking to us from within until death in order to sow the seeds of capitalist” and ordered a firm response “We must stick to them (capitalists) and austerely cut them off.”

Daily NK
Kim Min Se
1/25/2007

Since 2002’s 7.1. economic reform measures, North Korea’s markets have become most vital part of peoples life. North Korean market system operates from ‘general market’ with huge process chain to small local ‘yard market’ in the remote countryside. And, in between, there are always some brokers.

An importer buys goods from China and transports them through cargo trains or trucks to large cities in North Korea, such as Hamheung, Chongjin, Pyongsung or Nampo. Wholesale traders take those products and resell to local businesspeople. In North Korean jargon, such process is called “running.”

Usually imported goods from China or North Korean domestic ones take three steps of circulation; one or two laps of ‘run’ is added in case of mountain area.

Wholesale is mostly carried out by cars. Since oil and vehicles are not enough, sometimes wholesalers rent cars by themselves.

A forty one-year old trader working in Dandong, China, Kim, said that he purchases goods from Chinese factories firsthand. If the amount of import is huge, Kim uses freight. If not, a few trucks are fine for him. At maximum, Kim bought 60 tons of texture from China at once and resold it to North Korean wholesaler in one month.

In Hyesan, Yangkang province, 38-year old Choi, a broker of mainly Chinese cloths and shoes, sells his stuff to nearby Chongjin. Choi told the Daily NK “There are two types of so-called running; first run and second run. “Running” requires a lot of capital like money for vehicles. So the person must be patient and cautious when buying and selling something.”

According to the interview with Kim, using vehicle in wholesale business takes from 3.5 million NK wons (roughly 1,000 US dollars) to 35 million wons. The money includes not only car rental but also “transportation permit” application fee. Transportation permit is required when vehicle and personnel move inter-province, and costs relatively large amount of cash.

Kim keeps about twenty percent of total sales as his profit. The other 80% is comprised of original price of goods, car tax, gasoline and multifarious types of ‘extra expenses,’ or bribe.

The “first run” business is apportioned to a few with privilege in North Korea. Those who can earn cooperation from Security Agency and police are able to do the first run. Without bribery, it is impossible to obtain various permits that are essential for any businessperson.

In addition, to trade with overseas Chinese merchants, one must possess enough wealth and credit. Credit enables North Korean businessmen to buy goods in China with comparatively low price. Those first runners are, in most cases, wealthy North Koreans with ten thousand US dollars cash on their hand at any moment.

Yonhap
1/25/2007

North Korea on Thursday rejected a U.S. allegation that it misused funds from the United Nations Development Program (UNDP), accusing Washington of conducting a smear campaign to increase pressure on Pyongyang.

The United Nations announced this week that an audit will be conducted of the UNDP operations in North Korea after Washington alleged it had funneled immense cash payments to Pyongyang.

The UNDP aid projects in North Korea “have been carried out strictly in conformity with the U.N. regulations and in a transparent way,” a spokesman for Pyongyang’s Foreign Ministry said in an answer to a question by the Korean Central News Agency, the North’s official media outlet.

U.S. deputy ambassador Mark Wallace alleged last week that the UNDP’s operation in the North had been run “in blatant violation of U.N. rules” for years and that millions of dollars ended up in the hands of North Korean leader Kim Jong-il. The UNDP denied the U.S. allegation, while U.N. Secretary General Ban Ki-moon, a South Korean, announced an external audit of U.N. programs on Monday.

“Nevertheless, the United States is kicking up another anti-DPRK racket over not much aid funds of the UNDP from the outset of the year to meet its dirty political aims,” the spokesman said.

North Korea said it will continue to develop its cooperative relations with the UNDP.

“However, it will not allow any attempt to politicize the aid project nor accept conditional or unjust aid at all. The U.S. will be wholly accountable for all consequences to be entailed by its ongoing reckless campaign against the DPRK,” the unidentified spokesman said.

Yonhap
1/25/2007

North Korea has called upon South Korea to implement an earlier agreement to help revive its light industry in return for tapping into the communist nation’s natural resources, a senior unification official said Thursday.

During Unification Minister Lee Jae-joung’s first visit to the Kaesong Industrial Complex since he took office in December, Ju Dong-chan, head of the North’s Kaesong development agency “asked the minister to honor the agreement, saying it is not an aid, but only swapping of natural resources and raw materials,” the official said anonymously.

In July 2005, South Korea agreed to provide the North with US$80 million worth of raw materials to help it produce clothing, footwear and soap starting in 2006. In return, the North was to provide the South with minerals such as zinc and magnesite, after the mines are developed with South Korean investments, guaranteed by the Pyongyang government.

But the agreement was never carried out as North Korea abruptly cancelled scheduled tests of two cross-border railways in May 2006. North Korea’s subsequent missile and nuclear weapons tests further clouded hopes to implement the accord.

“Lee agreed in principle to honor the accord, but he held the position it is more important to create a favorable environment for carrying out the agreement,” the official told reporters.

Asked about the North’s denial of reports that it scrapped plans to change its partner for tours of Kaesong, the official said it is purely a matter of business, which does not require the intervention of the government.

Just hours after Lee returned to Seoul from Kaesong, an unidentified spokesman for the Korean Asia-Pacific Peace Committee (KAPPC) said the North “has no formal agreement with the Hyundai side over the issue of tour of Kaesong.”

Despite its earlier contract with Hyundai Asan, North Korea requested a new deal with Lotte Tours Co. in 2005. However, the South Korean government said the change can happen only when Hyundai Asan voluntarily concedes or pulls out of the business.

Korea Times
Donald Kirk
1/24/2007

Gold fever is rampaging through the ruling elite of North Korea in the quest for relief from seemingly incurable economic malaise exacerbated by more than a year as a total outcast from the international financial community.

Word from Pyongyang is that trading companies and even individuals are offering payments in gold for imports from across the border with China and also in barter deals for products imported from elsewhere. Gold also has become a form of currency in the internal reward system of payoffs and bribes manipulated by Dear Leader Kim Jong-il to guarantee the loyalty of high-ranking officials.

The rush to sell gold – and, to a lesser extent, silver – has sharply escalated in the 16 months since the US Treasury Department blacklisted Banco Delta Asia (BDA) in Macau, banning all firms doing business with US firms from dealings with that bank. The Treasury Department charged that the BDA had been the principal conduit through which North Korea was shipping counterfeit US$100 “supernotes” printed on a highly sophisticated Swiss-made press in Pyongyang.

It’s well known that the US ban forced the BDA to impose a freeze on North Korean accounts totaling $24 million, but less well known that the bank also stopped purchasing gold produced by North Korea’s historic gold mines, in operation, sporadically, since the late 19th century.

Output of the mines, in mountains about 160 kilometers north of Pyongyang, fell sharply in the late 1990s as a result of flood and famine but, with foreign expertise, has begun to pick up in the past few years.

The impact of the ban, moreover, goes far beyond a single bank in Macau. Although North Korea last spring sold $38 million in gold and silver in Thailand, Pyongyang has been frustrated in reviving its presence on the London bullion market, the world’s largest marketplace for precious metals, amid increased US pressure on the large international banks that are the major buyers of gold.

It was in the aftermath of the ban on the BDA that North Korea’s Chosun Central Bank coughed up the information required by the London Bullion Markets Association (LBMA) for listing as a “good deliverer” of gold. North Korea from 1983 to 1993 had been in the LBMA’s good graces, averaging a ton a month in sales to London buyers that included some of the world’s leading banks, but had slipped off the list after failing to keep up deliveries.

The fact that the Chosun Central Bank again is listed with the LBMA, however, is no guarantee North Korea will be able to sell its gold. The US Treasury ban on dealings with the BDA – as well as sanctions unanimously imposed by the United Nations Security Council after North Korea conducted an underground nuclear test in October – has spooked buyers in London.

While the LBMA disavows “political criteria” in deciding on eligibility for its “good delivery list”, an LBMA memorandum leaves no doubt how buyers are likely to respond to overtures from a country or company on an international blacklist. None of them, according to Stewart Murray, the LBMA’s chief executive, is willing to take delivery from a company or country that is subject to sanctions.

Or, as the LBMA memorandum puts it, “If, for instance, a bullion custodian considered that it was bound by national or international sanctions that were in force against a particular country, it would have to refuse to accept bars from a refiner in that country.”

The memorandum, moreover, does not mince words when it comes to stating the importance of a “good deliverer” rating. “Given the status of London as the world’s leading center for bullion trading,” it says, “the LBMA List has become the de facto world list of quality refiners and Good Delivery accreditation is a highly sought-after accolade.”

In recent years, “the List” – capitalized in the memo – “has grown primarily due to the listing of refiners in China and Russia” and now totals 77 refiners in 31 countries.

Investors see North Korea as competing on a world stage once sanctions are lifted. “What we’re doing is normal business,” said Roger Barrett, whose firm, Korea Business Consultants, operates in North Korea from headquarters in Beijing. By reviving old minesand developing new ones, he argued, “We’re creating jobs for people, in line with the UN basic charter, in line with economic growth.”

Barrett also believes North Korea may somehow get around the sanctions by finding new markets. “Why would you go to the trouble of going to London?” he asked. “They’re totally entitled to sell their gold.” The fact is, however, that London remains the place to sell gold in significant quantities on a regular basis.

Under the circumstances, Colin McAskill, chairman of Hong Kong’s Koryo Asia Ltd and the guiding light of the Chosun Development and Investment Fund, dedicated to investing in North Korea, accused top US Treasury officials of waging a campaign to make sure the ban on banks dealing with the BDA extends to gold and silver.

McAskill accused US officials, led by Treasury Secretary Henry Paulson and Stuart Levey, under secretary for terrorism and financial intelligence, of “using coercion, innuendo and sheer force to intimidate banks from dealing with North Korea”.

Among the victims of the US campaign is one of Koryo Asia’s projects, the Daedong Credit Bank, the only foreign bank based in North Korea, set up primarily to deal with accounts of foreign firms and embassies in Pyongyang. The freeze of North Korean accounts in the BDA, according to McAskill, includes about $7 million funds of Daedong Bank customers.

McAskill avidly supports North Korean demands for the US to lift the ban on the BDA – a move that would not only open up the frozen North Korean accounts but would provide the opening needed for Pyongyang to trade in a wide range of products around the world.

The financial issue is assumed to have ranked at the top of an agenda discussed in meetings in Berlin between the chief US envoy, Christopher Hill, and his North Korean counterpart, Kim Kye-gwan. Hill, reporting on the Berlin talks in stop-offs in Seoul, in Tokyo and Beijing, seemed hopeful about “progress” in the next round of six-party talks on North Korea’s nuclear weapons, expected to open in Beijing next month, after the failure of negotiators to get anywhere in the last round before Christmas.

South Korean media said North Korea had agreed to shut down its five-megawatt reactor at its nuclear complex Yongbyon in return for the US promise of massive aid, the crux of the 1994 Geneva Framework Agreement that blew up in 2002 amid US charges of a separate, secret North Korean program for developing warheads from enriched uranium.

There was no assurance, however, that the US is ready to relent on the BDA or that the UN Security Council will consider lifting its own sanction – enough to dissuade banks in London from buying North Korean gold regardless of the US ban on the BDA.

McAskill believes the rationale for the crackdown on the BDA is flawed. He questions the validity of the counterfeit charge and, in any case, says most of the frozen funds are not those of the North Korean government, even though they’re tired up in North Korean accounts. “We want to get a breakthrough on the six-party talks by getting the sanctions eased or lifted entirely,” he said. “We’re at a very delicate stage.”

Whatever happens, McAskill sees North Korea as ripe for investment, with precious metals high on the list of potential exports. “North Korea wants to move back into legitimate business,” he said. “They have a wealth of minerals – gold, silver, zinc, magnesite, copper, uranium, platinum – that needs investment to extract.”