North Korean Economy Watch

from the BBC:

North Korea announces tough restrictions in a bid to prevent the spread of the deadly respiratory disease Sars.

It has introduced strict quarantine measures and suspended a shipping service to Japan as well as a joint tourism project with South Korea.

Public health officials have outlined some of the steps being taken on state TV.

Emergency anti-epidemic centres have been set up at national and local level and quarantine officers are implementing stringent checks at all points of entry into the country, said Choe Ung-chin, head of the State Hygiene Inspection Institute at the North Korean Public Health Ministry.

Travellers bear cost

North Korea’s proximity to China, where the outbreak was first recorded, is the cause of particular concern.

“Most North Koreans who make business trips abroad and foreigners who enter our country do so via China,” Han Kyong-ho, another senior health official, explained.

“When the international train that runs from Sinuiju [border station] to Pyongyang enters the station, all travellers are thoroughly checked to see if they have Sars symptoms such as fever and dry coughs.

“Furthermore, all travellers coming into the DPRK from the places of origin of Sars are strictly isolated for 10 days.”

Mr Han said that Sars germs could be present in travellers’ luggage or in insects such as cockroaches.

“Therefore, every one of the travellers’ possessions is thoroughly sterilised, and medical inspections of all workers at the station who have had contact with people who have travelled abroad are being carried out in detail,” he said.

At Pyongyang international airport, incoming travellers who display any Sars symptoms are hospitalised while those who do not are quarantined for 10 days at specially designated hotels.

Russia’s Itar-Tass news agency reports that the cost of such unforeseen stopovers – 100 euros a night exclusive of meals – will be borne by foreign travellers themselves.

Services suspended

North Korea has also suspended the Man Gyong Bong-92 shipping service to Niigata Port.

Japan’s Kyodo news agency said the ship was slated to make three port calls to Japan in May, but two have already been cancelled.

The North Korean Government is also reported to have sent emails to thousands of pro-Pyongyang ethnic Koreans in Japan urging them not to visit their homeland for the time being.

And South Korea’s Hyundai Asan Corp was “stunned” to learn that North Korea had suspended a joint North-South tourism project it operates over Sars fears, South Korea’s Yonhap news agency reports.

The South Korean firm has run loss-making cruises for tourists to the North’s scenic Mount Kumgang since 1998 in a symbolic project to promote inter-Korean reconciliation.

The suspension of the tours heightens the possibility that all of Hyundai’s inter-Korean projects may come to a “screeching halt”, at a time when the company has been campaigning hard to revitalize the business, the agency adds.

From the BBC:

North Korea’s economy has been in the doldrums for more than a decade. Perhaps as many as a million people perished in a famine during the 1990s, and the food situation inside the country remains precarious today.

There are two hypotheses about why a country facing such problems has pursued nuclear weapons.

1. Its nuclear programme is merely a bargaining chip to be traded away to extract political and economic concessions from the US – a kind of atomic “trick or treat”.

2.  The North Koreans regard nuclear weapons as an end in themselves – a military deterrent and the ultimate guarantor of the regime’s survival.

North Korea’s foreign ministry said as much on 18 April when it declared, “The Iraqi war teaches a lesson that in order to prevent war and defend the security of a country and the sovereignty of a nation, it is necessary to have a powerful deterrent force only.”

Yet even from this perspective, there is an intriguing economic angle.

If a nuclear North Korea were to foreswear aggression toward South Korea, then its huge conventional forces would be redundant.

Its million-man army, an albatross around the economy’s neck, could be demobilised.

In fact, before the nuclear crisis erupted last October, North Korea floated trial balloons regarding the possibility of such a demobilisation.

But if the North’s army is to be demobilised, those troops have to have jobs to go to.

Last July, the government announced a package of policy changes designed to revitalise the economy.

These included marketisation, the promotion of special economic zones, and a diplomatic opening toward Japan, which the North hoped would pay billions of dollars in post-colonial claims and aid.

However, the rapprochement with Tokyo has stalled, and the expected capital infusion has not materialised.

The consensus of outside observers is that, so far, the reforms have largely failed to deliver.

Indeed, some of the policy changes, such as the creation of massive inflation and the demand that North Koreans surrender their holdings of dollars, could be interpreted as an attempt to re-assert state influence rather than reform the system.

Last month, Pyongyang introduced a new financial instrument it called a bond, though it is more like a lottery ticket. A mass campaign encouraging citizens to purchase these bonds suggests that politics, not personal finance, is the main selling point.

To make matters worse, the oil flow through a pipeline from China on which North Korea depends was interrupted earlier this month for several days.

The official explanation was that mechanical failure, not diplomatic arm-twisting, was the cause.

In sum, the economic situation remains dire.

However, both China and South Korea have indicated that while they want to see a negotiated resolution [to the nuclear issue], they are unwilling to embargo North Korea in the way the US envisions.

This reluctance to sanction Pyongyang undercuts the credibility of the US threat to isolate North Korea.

The Bush administration’s own rhetoric also calls into question its willingness to promote North Korea’s constructive integration into the global community.  

Marcus Noland is a senior fellow at the Institute for International Economics, and author of Avoiding the Apocalypse: The Future of the Two Koreas.

Korea Herald
Chris Gelkin
3/30/2007

“It’s not just about making money, at least not from our perspective as a producer,” declared Felix Abt, president of the Pyongyang-based pharmaceutical company PyongSu Pharma. “The profit margins are very small. It is more about supplying a necessary and quality product at a price people can afford.”

Abt was in Seoul earlier this week meeting with South Korean pharmaceutical companies and aid organizations. On the table was a unique opportunity that would allow them to expand their existing humanitarian work, while at the same time helping to lay a solid foundation for the future of the pharmaceutical sector in North Korea.

“One of the main purposes of my visit here is to meet with the people who donate drugs and medicines to North Korea, or their agents who are based here,” Abt told The Korea Herald. The “frontier-businessman” believes substantial savings could be realized if the donor had the drugs produced locally, in North Korea, rather than purchasing them here in the South or overseas and then having them shipped in.

“We have lower production costs in the North, and of course there would be savings on transportation. All of these cost savings would translate into more money being made available for the actual provision of drugs. And after all, that is the whole point of the exercise, isn`t it?” Abt said, posing a very pertinent question.

For each donated dollar, for each dollar spent, he explained, more medicines would actually reach the people who need them.

“So that, from a humanitarian position at the very least, is a very compelling reason for them to buy from us or have us produce them and then organize the distribution.”

PyongSu has been gaining experience through contract manufacturing for charity organizations, donors and pharmaceutical companies, but Abt says there is plenty of scope to do more.

“We have a total staff of about 30 running one full shift,” Abt said, “and obviously we have capacity to expand that.”

Abt said in addition to helping even more North Korean patients in hospitals and clinics throughout the country, aid organizations could also help raise the quality standards of the local pharmaceutical industry.

“Just shipping aid here is all well and good,” Abt explained, “but it has the danger of creating a culture of dependency. So rather than, for example, just giving them fish, we should give them a fishing rod and teach them how to fish.”

By expanding local production in terms of quantity and variety, Abt said, donors would be helping the people to learn how to stand on their own feet.

“This should be particularly interesting for pharmaceutical companies based here in the South,” he said, “it is absolutely in their long-term interests to see a pharmaceutical sector in the North that is developed and meets international standards which could later become a strong and important partner for South Korean companies.”

PyongSu recently underwent an international inspection and has been approved as a producer that meets the highest standards of pharmaceutical producers worldwide.

The company was launched in the summer of 2004 in a joint venture between the Ministry of Public Health and a group of foreign investors. By the end of 2006, PyongSu was producing a range of medications including painkillers and antibiotics among others.

The company`s mission was to reach and maintain production quality and service standards comparable to any pharmaceutical producer elsewhere in the world.

“We are making a direct contribution to the improvement of the local pharmaceutical sector,” Abt said, “through training, education, and our sharing of knowledge with medical professionals and staff at all levels throughout the DPRK.”

PyongSu pharmacists meet regularly with staff from hospitals and clinics to fully understand their needs, and provide them with up to date information on the latest drugs.

Abt said PyongSu has its finger on the pulse of the medical sector in the DPRK, and is in a unique position to serve humanitarian and aid organizations by producing drugs on their behalf and distributing them, “to those who are in need of them.”

New York Times
March 11, 2003
James Brooke

Even as it rattles its nuclear sabers, North Korea is toying with a version of market reforms to patch its ravaged economy. But eight months after changes like price incentives began, the economy retains an unmistakable Alice in Wonderland quality.

North Korea’s deep ambivalence about business could be seen on a recent Saturday in this mountain resort district, opening day of the Magnolia Blossom. Security police officers paced outside the freshly painted restaurant, hands clasped behind their backs, glaring at customers inside. In the dining room, waitresses bent over ever smaller shards of a broken water bottle. The maître d’, on loan from South Korea and looking lonesome in his black tie, was not authorized to tell North Korean workers to sweep up the glass.

Then the North Korean manager started to argue with an assistant over how much to charge for lunch — $9 or $100.

”I hear there are restaurants in Cheju that charge $100 for a meal,” the assistant volunteered, referring to a desirable southern vacation island.

An American diner, halfway through his bowl of spicy Pyongyang noodles, suggested calculating a price based on profits.

”Our purpose is not to make a profit,” Kim Chol, the 45-year-old manager, lectured patiently. ”It is for the everlasting honor of our beloved leader, Kim Jong Il, that we are interested in serving proper meals to South Korean tourists, even to foreign tourists.”

Asked the prices of ingredients for the meals, Mr. Kim said he did not know. He orders the food he needs. It comes.

While North Korea may be feared for its 11,000 artillery pieces pointed at South Korea, its 100 missiles pointed at Japan, and the nuclear weapons program that so angers Washington, this militarized nation remains an economic weakling with a gross domestic product that is 4 percent that of South Korea.

In this parklike border region not far from the 38th Parallel, where the Hyundai Asan Corporation of South Korea started sending tourist buses across the demilitarized zone in mid-February, two restaurants opened here this winter to cater to South Koreans paying with hard currency. But the primary incentives are not tips, which are banned in North Korea, but pleasing the little man with a high forehead whose visage appears on buttons worn by all restaurant employees — Kim Jong Il.

Last July, in a break with half a century of economic policy, Mr. Kim’s government increased wages as much as 20-to-30-fold. Soon after, food rationing was partly abandoned and prices were raised 20-to-40-fold on staples like rice, corn and pork.

The result, defectors and economists say, has been hyperinflation — at least in the small sector of the economy that runs on money.

”North Korea is short of food, clothes and consumer goods, but they cannot afford to import these materials from China and other countries,” Nam Sung Wook, a South Korean economist who is an expert on North Korea, said on a visit here.

With far too many North Korean won chasing far too few goods, the North Korean won now trades privately around 700 to the dollar. Last summer, in an effort to close the gap with the black market rate, the country devalued the won to a rate of 151 to the dollar from 2.16 to the dollar. As the won became increasingly worthless, the government ordered in the fall that all dollars be swapped for euros, a quixotic decree that was ignored in this resort region.

Last summer, climbing on a high-inflation treadmill reminiscent of some South American economies a decade ago, the government printed a new top-denomination bill, the 1,000-won note, nominally worth a little more than $6. Then in October, it added a 10,000-won note.

With the summer’s financial decrees, the government hoped to close the gap between prices here and much of the rest of the world. Under this plan, the reasoning went, the outside world would then step in with foreign aid and investment.

But North Korea quickly alienated almost all its aid donors. Hopes to win $1 billion a year in World War II reparations from Japan unraveled in September when officials balked at Japanese demands for the return of all Japanese kidnapped by North Korean agents. Relations with China reached a low point in October when Chinese authorities arrested the new head of a North Korean free trade zone, charging him later with ”economic crimes.”

Then came news of North Korea’s nuclear development. Nicholas Eberstadt, a Korea specialist at the American Enterprise Institute, said by telephone from Washington, ”The North Korean government tried to do a forced-march economic opening under the presumption they would get foreign aid and that no one would catch them on their nuclear program.”

Aid, which plays a crucial role in the economy, dried up, and the home-grown incentives stalled: the United Nations has forecast that harvests will not respond measurably this year to the new price incentives. With most potential farmland under production, any big lift for crops would have to come from more electricity for irrigation and more imported fertilizer.

When China made its first moves to free prices, in 1979, it acted cautiously and gradually, cushioned by a society that was 80 percent rural. In contrast, North Korean officials are imposing a food-price shock on a population that increasingly seeks the advantages of life in towns and cities.

”North Korea is living on the edge,” Kathi Zellweger said from Hong Kong, where she manages the North Korea aid program for the Roman Catholic charity Caritas. Fresh from a trip to North Korea in mid-February, she said, ”Kids who to me looked 9 to 10 years old were really 14 and 15.”

Along an urban coastal strip 50 miles north of here, visitors say it is easy to see why many outsiders dismiss North Korea as an economic disaster.

”You see mile after mile of derelict factories, you see smokestacks and very little smoke,” Gerald Bourke, a spokesman for the World Food Program, said from Beijing after a tour of North Korea’s eastern coast late in January. ”The factories are rusting, they are decaying. It goes on and on. There is nothing happening. It is quite eerie.”

Although North Korea is highly secretive about statistics, many economists in the South estimate that the North’s economy contracted by about a third in the 1990’s.

Ms. Zellweger, a frequent visitor to North Korea, said the economic changes have prompted cautious sprouts of private business.

”It was very visible that more people were outside — selling, bartering, running little bicycle repair shops, selling gas for cigarette lighters,” she said of eastern cities. ”People now have more money.”

But just as the only Internet cafe in North Korea is operated by a South Korean entrepreneur, the signs of economic life in North Korea come largely from investments by South Koreans.

At the Hyundai resort here, visited by about 120,000 people last year, ground is to be broken this spring on two golf courses, a ski lift and the renovation of two hotels. And in a country where it is easy to score firsts, Hyundai plans to build North Korea’s first bungee jump.

”One golf course will be by the mountains, the other by the sea,” said Yook Jae Hee, the resort’s general manager. ”We can use North Korean workers. They are very cheap.”

Expecting a flood of tourists using a new civilian road across the demilitarized zone, Kim Chong Seong has brought 50 car campers here. Without permission to roam the countryside, South Korean tourists are to use them as fixed mobile homes.

”North Koreans need to be taught competition, but they are not ready for capitalism,” said Mr. Kim, whose father’s company, Hyo Won Moolsan, pioneered South Korea’s trade with North Korea. ”North Koreans have no idea of price or design.”

(Typical of the North’s capricious view of contracts, it suspended Hyundai’s bus tours for the month of March to do ”road work.” Analysts say it may be a way of putting pressure on Hyundai to increase payments.)

Hyundai, which has yet to make money on its four-year-old tourism operation here, has contracts for six other big projects in North Korea, including building dams, an airport, power plants, a communications network and an industrial park.

On Feb. 16, its group chairman, Chung Mong Hun, admitted at a news conference that he had secretly sent $500 million to North Korea. Critics say the payments helped the company win the North Korean construction contracts.

After two decades of speculation by some that North Korea would follow the liberalizing path of China, many South Koreans are skeptical that the Communist government will ever produce attractive investment conditions.

”We are interested in one day opening restaurants in Pyongyang,” Kwon Won Sik, president of the Lotte Hotels and Resorts chain, said during a pause in a mountain hike here. Referring to North Korea’s levy of $100 a tourist, paid by Hyundai, he added, ”North Korea is really taking advantage financially.”

Despite incentives by the Seoul government for companies to invest and trade with North Korea, interest from outside has trailed off. Investors cite erratic supplies of electricity, the cavalier attitudes toward contracts, a small domestic market and bureaucratic paralysis.

The number of new projects approved by the South Korean government fell to 3 last year, from 13 in 1998. Of 52 Southern companies allowed to invest in the North, half have dropped out of the program.

South Korea’s new president, Roh Moo Hyun, has promised to extend to the North a generous economic investment program of ”peace and prosperity.” Trans-Korean gas lines and railroads are planned, projects that could provide revenue to the impoverished North.

Chung Dong Young, an envoy of Mr. Roh, said in January at the World Economic Forum in Switzerland: ”If North Korea gives up its nuclear programs and addresses other security concerns, it will be able to receive rewards both economic and diplomatic, that will surpass its own expectations. We are considering a bold North Korea reconstruction plan to move toward the Korean Peninsula Economic Community. ”

from the BBC:

The BBC’s Kevin Kim joined the first overland tourist trip to North Korea, and reflects on his journey to the other side of the border.

“I was on board one of 20 buses that crossed the DMZ for the first time.

As a South Korean it felt really strange, because up to now we were strictly forbidden from getting near to the DMZ.

The mountains on the North Korean side looked totally different from the mountains on the South Korean side.

It was very barren. There were hardly any trees.

North Korea is in an energy crisis right now and every single tree is put to good use, for heating.

The South Korean guide told us that while travelling through the DMZ we must not take pictures, wave outside, or show any South Korean newspapers or magazines through the window.

I guess that is why everyone on the bus was talking in a very soft voice.

Every few hundred metres there were North Korean soldiers with their rifles just looking on as the buses went by.

I was really tempted to just open the window and say “hello” or “nice to see you”.

But I had been told by my South Korean guide that I could open the window but I could not say anything to them.

Like the words of the South Korean song, “Longing for Mount Kumgang”, getting to North Korea and seeing its natural beauty has been something that people in the South could only long for until now.

Unification, too, is something that Koreans have only dreamed about.

But having travelled through the most heavily fortified border in the world, I began to think that while unification in the Korean peninsula may seem impossible right away, it does not have to stay as a dream.

Who knows, in 20 years time we might actually be seeing the fences coming down.

It is wishful thinking. But Koreans are natural born optimists. ”

Also from the BBC:

The overland border between the two Koreas has opened for the first time since the Korean war ended half a century ago. The BBC’s Seoul correspondent Caroline Gluck was among the first to cross.

Fanfare, fireworks and balloons greeted us at a ceremony on the South Korean border, as we prepared to journey through the world’s most heavily fortified road border to the North.

This is the first land route for civilians since the end of the Korean war half a century ago.

The pilot journey is due to pave the way for regular overland tourist trips to the North’s scenic resort of Mount Kumgang, or Diamond Mountain – which has been developed by the South Korean company Hyundai Asan.

Hyundai Asan’s president, Kim Yoon-Kyu, described the trip as a historic moment.

“I can compare it to breaking the wall between East and West Germany,” he said.

Opening the border was also one of the ways to reduce tensions between North and South Korea, he said.

“I’m going to persuade (the North Koreans) not to have any nuclear power. We need money. Money is better than nuclear power,” he said.

At the demilitarized zone, there was a razor wire fence on either side, and signs warning that landmines were present.

When we reached the military demarcation line, I could see the first North Korean soldiers watch the convoy – around 20 buses in all.

All around me I could see the mountains covered in snow.

It is a barren landscape but quite beautiful. Many believe that if the two Koreas reunify, it should be turned into an ecological zone.

On the North Korean side, a welcoming committee with a female brass band was waiting for us, playing the North Korean song Pangap-sumnida, or Nice to Meet You.

Around 150 North Koreans took part in the ceremony to welcome their southern counterparts.

Ro Chang hyup, a North Korean tourist official, said it was an important step forward in inter-Korean exchanges.

“This is a first step towards unification. It is helping to break the ice and I really welcome our south Korean brothers.”

Ri Jong-hyok, deputy head of the North’s Asia-Pacific Peace Committee which handles the North’s joint ventures with South Korea, said: “People are here for tourism. Why are you talking about nuclear issues? I get a headache when people talk about that”.

Bang Jong-Sam, head of the Mount Kumgang international tourism company, had a similar message.

“We don’t have nuclear weapons. Let the crazy people say whatever they want. All we have to do is to continue tourism,” he said.

Since 1988, when tours by cruise boat to Diamond Mountain began, around half a million South Koreans have travelled to the area.

For most, it is their only chance to visit the Communist North. They come to explore the peaks of the fabled mountain – immortalised in songs, paintings and poetry.

Fenced-in resort

But contacts between the two Koreans at the resort is limited.

The Hyundai-built tourism site is fenced in, and North Korean guides are on hand to monitor all movements.

You can catch glimpses of North Korean villages and people travelling on roads only allowed for locals – but most visible are the soldiers.

A group of around 40 soldiers marched by our tour group, singing the praises of their leader, Kim Jong-il.

He’s our great commander, they said.

“His love is like the sun, reaching out to every corner.”

If the project is aimed at breaking down barriers between the two Koreas, there is clearly a long way to go.

But some ventures, like a locally run restaurant open only to South Koreans, at least help to allow more contact between the two sides.

“I’m sure unification will come,” said my waitress.

“It’s really good that so many South Koreans are coming here. I’m proud to work here – and I welcome them.”

Projects like this and the opening of the cross-border road between the two Koreas are full of symbolism.

But, in practice, it is clear that there is still a long way to go before the two sides can freely mingle.

BBC
2/5/2003

The two Koreas have re-opened their land border for the first time in half a century, despite continuing anxiety about the North’s nuclear programme.

About 100 South Korean tourism officials passed through the heavily fortified frontier by bus on Wednesday, travelling to the scenic Mount Kumgang tourist resort, some 30 kilometres (18 miles) to the north.

The opening of the first of a set of planned overland links came as the US made its strongest pledge yet to hold direct talks with the North to resolve the nuclear crisis.

North Korea says that the only way forward is for face-to-face talks with Washington, without pre-conditions.

Historic crossing

Buses carrying around 100 officials from the South Korean company Hyundai and invited guests snaked from Kosung on the South’s east coast for a 50-minute journey along a dirt road towards Mount Kumgang.

The 10 buses were escorted by a South Korea military jeep as far as the border.

The jeep then pulled over to allow the buses to make the historic crossing, and a military official from the US-led United Nations Command, which enforces the armistice agreement that ended the Korean War, followed their progress on the other side of the border through binoculars.

If the pilot visit is a success, tours will officially begin next week.

The road is the first of four planned overland routes between the two sides to be completed. A parallel rail link on the east, and a rail and road link on the west are still under construction.

Diplomacy

The links are a key part of South Korean President Kim Dae-jung’s “sunshine policy” of economic co-operation with the Stalinist state.

Seoul has been urging the US to pursue diplomacy rather than sanctions over the current nuclear crisis.

US Deputy Secretary of State Richard Armitage on Tuesday gave a strong assurance that direct talks with Pyongyang would take place.

“Of course we’re going to have direct talks with North Korea. There’s no question about it,” he told the Senate Foreign Relations Committee.

But Mr Armitage said that the consultations would only take place when Washington was confident that it had built a “strong international platform” from which to end North Korea’s nuclear programme.

He also warned that North Korea’s reported moves toward restarting a plutonium reprocessing facility could enable it to build four to six nuclear weapons within months.

Despite Washington’s assurances that it has no plans to invade North Korea, it has announced that is considering strengthening its military forces in the Pacific Ocean as a deterrent against Pyongyang.

US officials said the reinforcements would help signal that a possible war with Iraq was not distracting the US.

But the commander of the 37,000 US forces in South Korea, General Leon LaPorte, stressed on Tuesday that any deployment would be made in conjunction with Seoul.

Economic co-operation

Some analysts believe the nuclear stand-off is simply a blackmailing tactic by the North to obtain more aid for the impoverished nation.

In easing the North’s economic plight, Hyundai has played a key role. It has hitherto organised cruises to the North by boat, but they have lost the company money.

Hyundai hopes the cheaper overland trip will attract more tourists.

But its role in inter-Korean co-operation has not been without controversy.

The company became embroiled in a scandal last week when government auditors revealed that a Hyundai affiliate had sent nearly $200 million to North Korea just before the 2000 inter-Korean summit.

The company said the money was used to finance its business projects in the North; opposition lawmakers allege the money was a pay-off for the summit.

Members of the ruling Millennium Democratic Party have called on President Kim Dae-jung to make a public statement, while opposition politicians are calling for an independent counsel to investigate the fund transfers.

Washington Post
John Pomfret
1/27/2003, Page AOl

Nuclear Crisis May Have Roots in Economic Failure

Six months after North Korea announced unprecedented wage and price increases to jump-start its miserable economy, runaway inflation is emptying millions of pocketbooks and bottlenecks in production are causing widespread shortages, according to Chinese and North and South Korean sources.

The black market price of rice, the staple of the Korean diet, has jumped more than 50 percent over the past three months in most parts of the country while tripling in others, according to North Koreans, Chinese businessmen and Western aid agency workers. Some factories in poorer parts of the country, such as the heavily industrialized east coast, have stopped paying workers the higher salaries that were a cornerstone of the reforms, recent North Korean arrivals to China said. Others have taken to paying workers with coupons that can be exchanged for goods, they said, but there are no goods in the stores to buy.

“Theft new economic policy has failed,” said Oh Seung Yul, an economist at the government-funded Korea Institute for National Unification in Seoul. “The hopes that were raised in July are today pretty much dashed.”

The apparent failure of North Korea’s attempt to promote economic activity and improve living standards constitutes an important backdrop for its recent threats to resume a nuclear weapons program, according to the sources.

On one hand, Oh and others said, North Korea’s isolated government needed a scapegoat. On the other, according to Chinese sources close to the secretive government of Kim Jong Ii, Pyongyang has determined that it risks economic collapse without security guarantees and access to international lending institutions such as the World Bank and International Monetary Fund, to which the United States holds the keys. So Kim manufactured a crisis to win concessions, they said.

“Now the economic situation is more precarious than before the reforms. They can’t do this halfway,” said Cui Yingjiu, a Chinese Korean economist and adviser to the North Korean government. “They risk social chaos and economic collapse.”

The crisis has been exacerbated by a drop in the humanitarian aid that had kept North Korea on life support since 1995. Because of a shortage of donations, the World Food Program has cut back the number of North Koreans it is assisting this year from 6.4 million to 3.5 million of the country’s estimated 22.6 million inhabitants. In September, the elderly and primary school-age children on the west coast were cut off. In October, kindergarten-age children, pregnant women and nursing mothers there lost out. In November, nurseries were scratched from the list.

“It’s a tough call deciding who has to be deprived,’ said Gerald Bourke, an official with the World Food Program in Beijing. Bourke said the recent “very rapid inflation” of rice prices is “putting food way beyond the pale for a lot of people.”

The World Food Program has 25,000 tons of food in North Korea and pledges of 75,000 additional tons, he said. It needs 511,000 tons this year.

North Koreans traveling over the border to Yanji, about 700 miles northeast of Beijing, said an initial wave of hope triggered by the changes announced in July is gone in almost all parts of the country except the capital, Pyongyang.

Lee Xiangyu, a North Korean refugee in China, was arrested by Chinese border police and returned to North Korea last summer, when the changes began. After a short stint in jail, the 19-year-old returned to her home town, Musan, along the border with China. By October, she said, the lumberyard where her father worked had stopped paying him and other workers the huge raises they had received as part of the effort to promote some aspects of a free-market economy.

But prices continued to rise. “There was no money in my house, and now the prices are so high,” she said. Lee sneaked back into China in December. “It’s not like it was in 1997 when people were starving to death,” she said, speaking of the famine that cost hundreds of thousands of lives. “But it’s worse in a way. Because everybody had hope for a little while and now they are desperate again.”

North Korea’s announcement of economic reforms was front-page news, in part because the measures fit into a series of other moves that led some observers to conclude Kim was ready to lead his country out of isolation. The steps included expression of regret following a clash between North and South Korean naval forces in June, the suggestion that North Korea would hand over Japanese Red Army members wanted in Japan for hijacking a Japanese airliner in 1970, an informal meeting in July between North Korean Foreign Minister Paek Nam Sun and Secretary of State Cohn L. Powell, transportation links between North and South Korea, a summit between Kim and Japanese Prime Minister Junichiro Koizumi and talk of establishing as many as five special zones for foreign investment.

The economic changes included raising prices and wages, devaluing the North Korean won against the dollar and cutting state subsidies for failing businesses. Wages were increased between 900 percent and 1,500 percent. Prices, which are in theory set by the state, went up as well. Rice went up 4,000 percent, corn 3,700, pork 700, diesel fliel 3,700, electricity 5,900, apartment rent 2,400 and subway tickets 900.

The government announced that factories with bloated workforces could effectively lay off unnecessary workers so they could concentrate on making things again — a step North Korean industry had not taken since economic troubles began in 1995.

The main motivation for increasing the price of rice was to prompt farmers to plant more food. But Cui, who attended a conference on North Korea’s economic changes last fall in Pyongyang, said farmers were not happy.

“Grain prices went up, but so did prices for inputs like fertilizers and seeds,” he said. ‘So all gains were canceled out.”

Another issue, Cui said, is electricity. North Korea has good hydropower resources, but as farmers become interested in planting more crops, they will want to use water in reservoirs for irrigation, not for power generation. “There are a whole series of these conundrums and Catch 22s,” Cui said.

He said North Korean factories have yet to begin producing goods people want to buy. That is why trucks rolling into China from the Dandong border crossing, 350 miles southwest of Yanji, now carry clothes, television sets, shampoo and other consumer goods.

The changes befliddled Western and Chinese economists from the beginning. Chinese experts noted that when China undertook its first major economic reform in 1979, it increased the price of grain by only 25 percent. Second, they said, when China began this process, 80 percent of its population lived in rural areas, so there was a huge pooi of potential beneficiaries from the liberalized agricultural policies. But North Korea is highly industrialized: Two-thirds of its people live in cities.

Marcus Noland, at the Institute for International Economics in Washington, speculated that the changes were either a desperate attempt to jump-start a half-dead economy or a backhanded attack against North Korea’s nascent private economy. Increasing prices would reduce the value of currency held outside the state system, breaking the back of private entrepreneurs.

But then again, he said in a recent paper, “the possibility that economic decisions are being made by people who do not grasp the implications of their actions should not be dismissed toohastily.”

Correspondents Doug Struck and Peter £ Goodman in Seoul contributed to this report

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Here are sections of interest:

About DPRK, Agriculture, China, Economy, Energy, Transition

According to the Chosun Ilbo (2002-11-21):

It has been learned that North Korea recently opened a branch office of the (North) Korea Trade Bank in Dandong, China across the border from Sinuiju, a step tied with the designation of Sinuiju as a special administrative region. The only bank in the North specialized in foreign currency and responsible for exchange rates, the Korea Trade Bank opened its Dandong branch in October under the a judgment that promotion of economic cooperation with Dandong is a prerequisite to success for the Sinuiju capitalism experiment, said South Korean government officials.

The officials saw the step as indicating Pyongyang’s will to develop the Sinuiju SAR despite the detention of Yang Bin, the first administrative officer of the SAR. The Korea Trade Bank is empowered to conclude agreements with foreign financial institutions under accords reached between governments involved. The bank’s recent opening of its branch office in Dandong, accordingly, indicates that China, which originally opposed to the Sinuiju SAR, is in favor of it now.

The Korea Trade Bank’s Dandong branch is expected to handle not only inducement of foreign investments into the Sinuiju SAR, but also North Korean corporations’ exports to China via Dandong, observed the officials.

The article used as a source for this post has since been removed from the Choson Ilbo web page.

A deal between the ROK and DPRK governments should allow construction to begin next month in Kaesong (Just north of the DMZ and former capital city).

The DPRK has designated the area as a Special Economic Zone (SEZ), giving companies a free hand there.

A little more here…