North Korean Economy Watch

Bloomberg
Bradley Martin
5/16/2007

For decades, tourists visiting North Korea have been brought to a 200-room, 70,000-square-meter palace completed in 1978 that displays presents to Kim Il Sung, the “Great Leader,” who died in 1994.

Starting with Joseph Stalin’s 1945 gift of a bulletproof railway carriage, the items include a stuffed bird from American evangelist Billy Graham and a piece of the Berlin Wall donated by a German writer.

These days most visiting foreign dignitaries bring gifts for Kim’s eldest son and successor, Kim Jong Il, 65. The junior Kim’s loot is housed in a 20,000-square-meter (215,278-square- foot) annex that was completed in 1996 — a time when a famine was starving tens of thousands of North Koreans.

Why would the country have spent vast sums on four-ton bronze doors and polished marble floors? “Our people couldn’t display all these precious gifts in a poor palace,” says tour guide Hong Myong Gun. “So we built this palace with our best.”

The gifts in the windowless “International Friendship Exhibition” at Mt. Myohyang, a two-hour drive north of the capital, Pyongyang, range from the trivial to the grandiose.

Cable News Network founder Ted Turner donated paperweights with the CNN logo. A tribal chief in Nigeria offered a throne featuring carved lions, with matching crown and walking stick. Romanian communist dictator Nicolae Ceausescu brought the stuffed head of a bear he had hunted and killed.

Giving and Receiving

In Asia, the protocol of gift-giving has been well established since Chinese emperors began expecting visitors to bear tribute. The Chinese know how to give as well as to receive: Pride of place in the exhibit goes to one of their presents, a life-sized wax figure of Kim Il Sung standing on a three-dimensional representation of a lake shore.

Reverent music, calculated to induce bowing, plays in the background of the posthumous gift, the final exhibit viewed by visitors to the hall.

The elder Kim’s title of President for Eternity makes him the world’s only dead head of state, and Hong says he continues to receive gifts. As of last year, his presents numbered 221,411.

“No other president could draw so many presents, so our people live in pride,” she says. “Except for this place, where can you see such a sight?”

The annex for Kim Jong Il, whose titles include secretary general of the Workers’ Party and chairman of the Military Commission, houses 55,423 additional presents, Hong says. As with his father’s gifts, most of them were never used but were immediately donated to the exhibition.

A Dynasty Sedan

Some highlights in the annex: a 1998 luxury sedan from the founder of South Korea’s Hyundai group — the model named, appropriately enough, Dynasty — and two roomfuls of carved, gilded furniture from South Korea’s Ace Bed Co.

From time to time, groups of uniformed soldiers troop past to see the gifts. A high percentage of them are five feet tall or shorter. In the 1990s, North Korea reduced the minimum height for military service to 148 centimeters (4 foot 9 inches) from 150 centimeters and the minimum weight to 43 kilograms (95 pounds) from 48 kilograms, according to South Korea’s National Intelligence Service.

A 2004 World Food Program nutritional survey found that 37 percent of North Korean children suffered chronic malnutrition. The state “bears central responsibility” for the shrinking of North Koreans, says Marcus Noland of Washington’s Peterson Institute for International Economics, co-author of a new book about the famine.

Freeing Up Foreign Exchange

“As aid began arriving, the North Koreans cut commercial food imports, freeing up foreign exchange,” Noland said in an e-mail exchange.

The saved money was used to purchase surplus military aircraft from Kazakhstan and to build monuments “to the recently departed Great Leader Kim Il Sung and his son,” Noland says. If the regime had maintained the rate of commercial food imports during the 1990s, using aid as a supplement instead of a substitute, he says, “the famine could have been avoided.”

Noland estimates the death toll at 600,000 to 1 million; others have said as many as 4 million people may have died.

Tour guide Hong, 27, places the blame elsewhere. “From 1993 to 2000 our people suffered from countless natural disasters and also from other pressure in the economic field owing to the U.S. aggressors,” she says, referring to sanctions. Even during such hardships, she says, constructing the annex with the best materials was “the greatest desire of our people.”

As she speaks, there is a brief power blackout, a frequent occurrence in the energy-short country. When the lights come back on, Hong continues.

“Our people are very grateful because the Great Leader Kim Jong Il sent all the gifts here for the people to look at freely,” she says. “It was our duty to preserve them and show them to the new generation.”

Yonhap
5/11/2007

An external audit report on United Nations activities in North Korea will be presented to a general meeting of the United Nations next week, a Washington-based radio station reported Friday.

Citing an informed source, Radio Free Asia said that an audit report is being made of the relevant documents and information without the inspectors visiting the communist country. The audit of all U.N. operations in North Korea began in March amid U.S. allegations that U.N. aid money was being diverted to the North’s regime.

The U.N. Development Program (UNDP) said it has completed the process of wrapping up all of its operations in North Korea, and its two remaining staff members were supposed to leave Pyongyang last week.

The agency suspended operations on March 1 because North Korea failed to meet conditions set by its executive board following suspicions that the aid money might be diverted for illicit purposes, including the development of nuclear weapons. It withdrew seven of its nine international staff in mid-March.

U.N. Secretary-General Ban Ki-moon ordered an external audit of all U.N. operations in North Korea that began on March 12.

The UNDP’s office equipment and materials are currently being safeguarded by the World Food Programme in Pyongyang and will be available to the auditors, officials from the international body said.

Wall Street Journal Editorial
5/3/2007
Page A16

It’s been two and a half weeks since the 60-day deadline passed on April 14 for North Korea to comply with the first part of the nuclear accord reached in February. That includes shutting down the Yongbyong nuclear reactor, letting in U.N. inspectors and providing a list of all nuclear programs. But so far no word from Pyongyang, and nothing from Beijing or Washington either. President Bush and Secretary of State Condoleezza Rice both recently claimed their “patience” is not “endless,” contrary to all available evidence.

Meanwhile, another North Korean deadline has been allowed to lapse. On January 19, United Nations Secretary-General Ban Ki Moon ordered an “external inquiry” into all U.N. programs in North Korea, including the United Nations Development Fund, Unicef, the World Food Program and the U.N. Population Fund. Mr. Ban’s announcement followed our report on irregularities in UNDP programs in North Korea and U.S. concerns that tens of millions of dollars in hard currency were funneled to dictator Kim Jong Il.

Mr. Ban imposed a 90-day deadline for the audit, but it appears to be lost somewhere in the U.N. bureaucracy. The auditors spent two weeks in March at UNDP headquarters in New York interviewing staff and looking at the books, but they have yet to set foot in North Korea, much less file a report. Oh — and the “independent” and “external” audit Mr. Ban ordered is being conducted by the U.N.’s own Board of Auditors, consisting of a team from South Africa, France and the Philippines.

We had a challenge gathering even these details. The Board of Auditors refuses to talk to the press. The UNDP understandably feels it lacks standing to comment on an investigation of itself. And Mr. Ban’s press office can’t seem to get the facts straight, first telling us the auditors were in Korea and then informing us they weren’t. You’d think someone at the U.N. would show more interest in explaining one of the boss’s priorities to the public.

It will be interesting to see how Kim Jong Il responds if the auditors get around to asking for visas. The dictator recently told the last two UNDP officials left in Pyongyang to get out. The UNDP suspended operations there in March, after our reports and after the Kim government refused to let aid officials visit the projects they fund.

Mr. Ban is staying mum on the missed U.N. deadline. But on the evidence so far, Kim can be forgiven if he concludes that the world isn’t serious about enforcing any of its deadlines concerning North Korea.

Yonhap
5/1/2007

The U.N. Development Program (UNDP) has completed the process of wrapping up all of its operations in North Korea, a Washington-based radio station reported Tuesday.

At the request of North Korea, the UNDP’s two remaining staff members are supposed to leave Pyongyang on May 3.

But the pullout will have no influence on the ongoing external audit of all U.N. operations in North Korea, which began in March amid U.S. allegations that U.N. aid money was being diverted to the North’s regime, David Morrison, spokesman for the UNDP, said in an interview with Radio Free Asia.

The agency suspended operations on March 1 because North Korea failed to meet conditions set by its executive board following suspicions that the aid money might be diverted for illicit purposes, including development of nuclear weapons. It withdrew seven of its nine international staff in mid-March.

U.N. Secretary-General Ban Ki-moon ordered an external audit of all U.N. operations in North Korea which began on March 12.

The audit is being made of the related documents and the UNDP made sure that inspectors get all the copies needed for the audit, the spokesman said. Currently, the deputy resident representative and the operations manager are the only UNDP officials in North Korea to support the independent external audit.

The UNDP’s office equipment and materials will be turned over to North Korea, another UNDP official said.

Yonhap
4/16/2007

The U.N. World Food Program (WFP) has only been able to gather one-fifth of the amount of recovery aid it is seeking for North Korea, with less than a year left in the aid program, according to the agency’s tally on Sunday.

A resourcing update for North Korea dated Thursday showed the WFP received donations totaling just short of US$21 million, accounting for 20.53 percent of the aimed $102 million. The donations include $3.2 million carried over from previous operations.

Russia remained the biggest donor with $5 million, which is almost 5 percent of the total. Switzerland provided $2.57 million.

Germany donated $1.66 million. Other contributors include Cuba, Denmark, Ireland, Luxembourg, Italy and Poland.

Private donations totaled $8,474 as of Thursday.

The United Nations has contributed $2.3 million, or 2.25 percent of the total.

Called “protracted relief and recovery operation,” the project runs from April 1, 2006, to March 31, 2008.

Daily NK
Yang Jung A
3/28/2007

The World Food Programme (WFP) revealed that North Korea had for the first time admitted that they were lacking a million ton of food.

Recently, Tony Banbury, WFP Asia Director spent 3 days on location with officials from the North Korean Agriculture Ministry and Foreign Ministry where the food situation was discussed.

On the 26th, Banbury told Reuters, “This is a very significant development that they themselves are confirming they have a gap of 1mn tones.”

Director Banbury informed that the WFP and other sources had provided for North Korea’s food variance which equated to about 20% of the nations needs, however that these sources had already been wasted.

Disputably, these figures made by Mr. Banbury do not correspond to the figures on North Korea’s crop yields. Some even criticize that it was inappropriate of the WFP to directly quote comments made by North Korean officials.

According to a source by the DailyNK, the cost of rice has remained at 800~900 won(US$0.25~0.29). Especially with the forthcoming cyclic hardships of spring harvest, these figures suggest that market costs are actually stabilizing.

Since the breakdown of the distribution system, many North Koreans have resorted to purchasing rice at the markets. In North Korea, the cost of rice is a good representation of market conditions, and considering that rice prices are showing constancy is evidence that there have not been drastic setbacks as a result of the rice distributions.

In comparison to last year where flooding made the food crisis chronic in various districts throughout North Korea, the situation hasn’t really deteriorated. Rather, the continuous inflow of food and hence trade from China has helped maintain market prices, North Korea-China tradesmen say.

Earlier this year, the Rural Development Administration in South Korea estimated North Korea’s food production to be 4.3mn tons. Evidence from a defector who once worked at North Korea’s food distribution ministry and past analysis on crop production suggests that North Korea would not have incurred a food crisis in the case it had produced more than 4mn tons of output.

Simply put, 4.3mn tons of production is at the least enough to maintain the lives of North Korean citizens. Undoubtedly, in a society like North Korea, this figure could initiate a food crisis and starvation in the lower class. However, inflating the shortage of food may only cause exhaustion of essential aid.

In addition, some argue that international organizations are actually provoking this vicious cycle in North Korea by decreasing the real amount of food produce.

Recently, North Korean analyst Marcus Noland published a report, ‘Famine in North Korea’ where he argued that about 50% of international food aid was being consumed by the military and, or the elite class.

In the report, he said, “The North Korean government consistently sought to frustrate transparent, effective humanitarian relief” and that, “Diversion is almost certainly occurring on a large scale, enough food to feed between 3 to 10 percent or more of the North Korean populace. Some of this aid is almost surely consumed by politically connected groups, including the military.”

Reuters
Paul Eckert
3/23/2007

The diplomatic deal that promises to bring North Korea aid in exchange for scrapping its nuclear weapon programs might allow the government to resist meaningful economic changes, an expert on the secretive communist country’s economy said on Friday.

Marcus Noland of the Peterson Institute, a Washington economic think tank, said research for his new book on North Korea’s deadly 1990s famine showed Pyongyang was “at best, ambivalent” about changing policies that led to that disaster.

“The great hope is that reassurances in terms of external security will give the North Korean regime the political room to engage in greater political and economic liberalization at home,” the economist told Reuters in an interview.

But the diplomacy playing out in Beijing could have the opposite effect, said Noland, co-author of “Famine in North Korea: Markets, Aid and Reform” with Stephen Haggard of the University of California, San Diego.

“It could well be that a nuclear deal that resulted in greater amounts of aid would actually allow the North Korean government to intensify activities that are essentially reestablishing economic and political control over the population,” he said.

Negotiators from North and South Korea, China, the United States, Japan and Russia were in Beijing this week, seeking to begin implementing a Feb. 13 deal that would give the North aid and security assurances in return for shutting down a nuclear reactor and preparing other disarmament steps.

Noland’s 368-page study of the famine that killed an estimated 1 million North Koreans in the late 1990s shows how the rigid central planners of Pyongyang were forced to allow markets to feed people and to give farmers some limited freedoms, but then pulled back when the disaster eased.

“When things look better … the North Korean government tries to pull back on this process of marketization and reform,” Noland said.

“One of the saddest things is that as food aid began arriving in North Korea, the regime systematically cut the amount of food it bought on commercial terms,” he said.

The author of three books on North Korea decries what he says are “truly reckless” food policies since the end of the famine. Pyongyang has banned trading in grain on markets that people rely upon for food, confiscated grain in rural areas and reneged on policy promises to farmers, he said.

“In a variety of ways, it seems to want to put the genie back in the bottle,” he said.

Reuters
Lindsay Beck
3/26/2007

North Korea has admitted for the first time to food shortages of a million tonnes, the World Food Programme said on Monday, adding that in the absence of better donor support, millions are vulnerable to hunger.

In the past that food gap — which represents about 20 percent of North Korea’s needs — was met by a combination of bilateral aid, WFP support, loans and commercial interests, but those sources are all drying up, the WFP said.

“This is a very significant development that they themselves are confirming they have a gap of 1 million tonnes,” WFP Asia director Tony Banbury told Reuters.

The figure, which is in line with U.N. estimates, was given in a meeting with the vice-minister of agriculture, Banbury said in an interview from North Korea, where he met officials at the Agriculture Ministry and Foreign Ministry and spent three days in the field.

“There is a real food security problem in the country that is now not being met either by domestic production or external sources.”

North Korea suffered a famine in the mid-1990s that killed as many as 2.5 million people, and has since suffered chronic food shortages.

The WFP began working there in the aftermath of the famine and grew into its biggest humanitarian agency, but was forced to radically scale back its programme last year after the government said it no longer wanted handouts.

Under its new programme, the U.N. agency aims to reach about 1.9 million people, but Banbury said a lack of donor support meant it was only reaching 700,000 of a total population of about 23 million.

North Korea, which tested its first nuclear device last year and is at the centre of diplomatic efforts to dismantle its atomic programme, has made incremental improvements in the nutritional status of children, but that could be reversed.

“There is a real risk that we’re going to see backtracking on the improvements, and people who are just on the edge and vulnerable could find themselves in a very difficult situation from a food and nutritional standpoint,” Banbury said.

Despite the close government watch maintained throughout the visit, Banbury said that for the first time WFP officials were granted a spontaneous request to see government warehouses that store WFP-donated food.

“On the one hand, it was very innocuous — it was just a warehouse with sacks of food in it. On the other hand, it was symbolically, quite important and welcome,” he said.

There were also moments of frankness from officials in the country known for its reclusiveness during Banbury’s visits to a paediatric hospital, a boarding school and orphanages in the west of the country.

“In every institution we visited there were malnourished children, according to the officials there themselves, not just our observations,” Banbury said.

Some of the children were severely malnourished, he said.

“It was my impression that the person on the street — the woman riding the bicycle, the kid walking along the side of the street — was thin and hungry and needed more food than they were getting.”

BBC
2/7/2007

As six-party talks on North Korea’s nuclear programme resume in Beijing, the BBC’s Penny Spiller considers whether food shortages in the secretive communist state may have an impact on progress. 

Negotiators for the US, North Korea, China, Japan, South Korea and Russia are meeting in Beijing amid signs of a willingness to compromise.

While the last round of talks in December ended in deadlock, bilateral meetings since then have brought unusually positive responses from both North Korea and the US.

Such upbeat noises were unexpected, coming four months after North Korea shocked the world by testing a nuclear bomb.

The test brought international condemnation and UN sanctions, as well as a significant drop in crucial food aid.

South Korea suspended a shipment of 500,000 tonnes of food supplies, while China’s food exports last year were sharply down.

The World Food Programme has struggled to raise even 20% of the funds it requires to feed 1.9 million people it has identified as in immediate need of help.

Aid agencies warned at the time of a humanitarian disaster within months, as the North cannot produce enough food itself to supply its population. It also lost an estimated 100,000 tonnes-worth of crops because of floods in July.

‘Queues for rations’

Kathi Zellweger, of the Swiss Agency for Development and Cooperation in Pyongyang, said the present food situation in the country was unclear.

No figures are yet available for last year’s harvest, and it was difficult to assess what impact the lack of food aid was having on supplies, she said.

However, the UN’s Food and Agriculture Organisation estimated the country was short of one million tonnes of food - a fifth of the annual requirement to feed its 23 million people.

South Korea-based Father Jerry Hammond said there were signs of shortages - not only in food but also in fuel - when he visited the North with the Catholic charity Caritas in December.

He described seeing long queues for rations, and ordinary people selling goods in the street for money to buy the basics.

“You do expect to see more shortages during the winter time,” the US-born priest, who has visited North Korea dozens of times in the past decade, said.

“But I did see a noticeable difference this time.”

High malnutrition rates

Paul Risley, of the World Food Programme, said people in North Korea may still be cushioned by the November harvest and the pinch will be felt in the coming months.

“We have great concerns,” he said, pointing out that North Korea was now in its second year of food shortages.

He says “stabilising food security” in the country will be very relevant to the talks in Beijing.

“It is certainly the hope of all who are observing the situation in [North Korea] that imports of food can be resumed and returned to prior levels,” he said.

“Malnutrition rates are still the highest in Asia, and we certainly don’t want to see those rates rise any further.”

Father Hammond thinks Pyongyang may be persuaded to consider compromises in Beijing, but is unlikely to do so as a result of any pressure from the people of North Korea.

“People are very cut off from the outside world, and there is constant propaganda about national survival. Even if they go hungry, it will be considered patriotic,” he said.

There have been signs of possible compromise from both sides in the run up to the talks.

Washington has reportedly hinted at flexibility over its offer of aid and security guarantees, as well as showing a willingness to sit down and discuss North Korea’s demands to lift financial sanctions.

Meanwhile, North Korea reportedly recently told visiting US officials it would take the first steps to disband its nuclear programme in return for 500,000 tonnes of fuel oil and other benefits.

And South Korea is keen to resume its shipments of rice and fertiliser aid - if Pyongyang agrees to freeze its nuclear programme, the Choson Ilbo newspaper has reported.

As the nuclear talks resume, all sides will be looking to translate such pressures into progress.

Bloomberg.com
Emma O’Brien
2/2/2007

The United Nations program to feed about a quarter of North Korea’s 24 million people needs funds to operate until 2009, after countries such as the U.S. ended or reduced their support, the head of the World Food Program said.

“We only have 16 percent of the funds needed to do our work in North Korea over the next two years,” James T. Morris said late yesterday in Wellington, New Zealand. “The U.S. used to be our largest donor in North Korea, but we haven’t received any money from them for the past 8 to 9 months.”

More than 1 million people died in North Korea during the 1990s as a result of famine caused by drought, floods and economic mismanagement. North Korea’s international isolation deepened last October when the United Nations Security Council imposed sanctions after the communist country tested its first nuclear bomb.

The North Korea government said in 2005 it no longer needed the UN program that aimed to feed about 6.5 million people because it succeeded in harvesting enough grain. Floods last year reduced grain production by an estimated 90,000 metric tons, almost one-fifth of the minimum harvest needed to feed the population, the WFP said at the time.

“I am very concerned about the situation in North Korea,” Morris said, as the country’s crop deficit is forecast to be 1 million tons this year. “We are not able to do our job unless there is additional support to provide food.”

Morris, who will leave the directorship of the WFP early this year after 5 years at the helm, was in Wellington for talks with New Zealand’s aid agency, NZAID, on food aid to East Timor. His speech to the New Zealand Institute of International Affairs was his last on an international visit.

The WFP and its sister agencies, the UN Development Program and the UN children’s fund Unicef, are the only major non- governmental organizations still active in North Korea.

Government Restrictions

North Korea is the only country in the world where the UN program has to work through the government. The administration chooses all their local workers and all food has to be distributed via government-selected contractors.

“It’s the only place in the world where we don’t have universal access,” Morris said. “The government makes life very difficult for our work.”

The program used to distribute to 183 counties in North Korea. The government now restricts them to 29. Constraints placed on the program by the government are “abhorrent and unacceptable,” he said.

The average 7-year-old North Korean boy is 8 inches shorter and 20 pounds lighter than his South Korean counterpart, Morris said, and 40 percent of North Korean women are anemic.

Russia, China

Russia is now the largest contributor to North Korean aid, Morris said. The U.S. provided about 47 percent of all contributions, in both commodities and funds, over the past 10 years. The WFP, the UN’s largest division, had an operating budget of more than $2.8 billion last year, he said.

China and South Korea, which send food directly to North Korea, are also scaling down their aid.

“They intend to reduce their bilateral food and fertilizer assistance,” Morris said, adding China’s toughened stance toward North Korea since the missile test may be behind the move.

China, North Korea’s closest ally, supported the UN sanctions imposed after the nuclear test that ban sales of military equipment and luxury goods to the country. The U.S. imposed financial restrictions on North Korean bank accounts in October 2005 over allegations of money laundering and counterfeiting.

The issue stalled talks between North Korea, the U.S., China, Japan, South Korea and Russia on dismantling North Korea’s nuclear program. The forum resumed in December after a 13-month break with North Korea refused to enter discussions within the six-nation forum until the U.S. lifts the sanctions.

The six nations will hold another round of talks in Beijing beginning Feb. 8.