North Korean Economy Watch

From Forbes.com: 

South Korea will ship 1,000 tons of copper to North Korea this week in return for the disabling of its nuclear plants, officials said on Monday.

The shipment, worth 8.9 billion won ($8.5 million) will begin on Thursday, the unification ministry said.

also…

South Korea has already made a shipment of 5,100 tons of steel plates to the North, apparently for use in patching up its decrepit power stations.

Read the full article here:
SKorea to ship copper to NKorea this week
Forbes.com (Thompson Financial News)
5/26/2008

From the Associated press (via the Herald Tribune)

North Korea is offering China US$100,000 (€64,500) to help earthquake survivors.

The North’s Korean Central News Agency said Saturday the country made the offer to China’s government, which is scrambling to cope with the aftermath of Monday’s magnitude 7.9 quake. It did not elaborate.

Read the full article here:
North Korea offers US$100,000 in aid for Chinese earthquake survivors
Associated press (via the Herald Tribune)
5/17/2008

UPDATE: 
North Korea acknowledges US aid in domestic media.  From the Choson Ilbo:

North Korea on Saturday said through its official Korean Central News Agency (KCNA), “The food aid of the U.S. government will help settle the food shortage in (North Korea) to a certain extent and contribute to promoting the understanding and confidence between the peoples of the two countries.” This announcement came 12 hours after the U.S. offer of 500,000 tons of food aid to the Stalinist country.

On Sunday, North Korea also reported on the U.S. offer of food aid through North Korea’s state-run Korean Central Broadcasting Station, a broadcaster designed for domestic audience, and Radio Pyongyang, a broadcaster designed for overseas audience.

Full story here:
Pyongyang Reacts Promptly to U.S. Food Aid Offer
Choson Ilbo
5/19/2008

ORIGINAL POST
The USAID press release is below.  USAID is supplying 500,000 metric tons of aid to North Korea.  This comes in at 12.5% of the approximately 4 million tons needed to support the population per year (according to Noland, Haggard, Weeks).

Supposedly USAID and the DPRK have reached an agreement on monitoring the distribution of aid – to make sure it gets to where it is needed most.  The specifics of this deal have not been made public as far as I am aware (if any readers know the procedures, please pass them along). 

USAID press release:
Resumption of U.S. Food Assistance to the North Korean People
May 16, 2008
Press Office: 202-712-4320
Public Information: 202-712-4810

WASHINGTON, D.C. – The United States and the Democratic People’s Republic of Korea (DPRK) have reached an understanding on the parameters of a program for the resumption of U.S. food assistance for the North Korean people. International organizations and experts have expressed concern about a severe food shortage in North Korea, and the DPRK has explained to the United States that it faces a major shortfall in food supplies. In response, the United States has pledged significant assistance. The two sides have agreed on terms for a substantial improvement in monitoring and access in order to allow for confirmation of receipt by the intended recipients.

The United States intends to provide the DPRK with 500,000 metric tons in food commodities over the course of a 12-month program beginning in June 2008, with the World Food Program (WFP) to distribute approximately 400,000 tons and U.S. NGOs approximately 100,000 tons. The United States and the DPRK have agreed on a framework to allow WFP and NGO staff broad geographic access to populations in need and the ability to effectively monitor the distribution of U.S. commodities. The food aid will come from the Bill Emerson Humanitarian Trust. The exact commodity mix and delivery schedules will be based on the outcome of a joint needs assessment to be conducted in coming weeks.

An experts’ meeting will be convened in Pyongyang in the near future to work out operational matters and commence detailed implementation of the program. Premised on a successful outcome of those discussions, the United States will deliver a first shipment in June, in light of the urgency of North Korea’s food shortfall. This program has developed through close coordination and extensive consultation with experts in the South Korean government.

According to the Financial Times (h/t One Free Korea):

The US has agreed to give North Korea 500,000 tonnes of food aid under a new deal that would allow monitors unprecedented access to oversee distribution in the Stalinist state.

Washington will supply 400,000 tonnes via the United Nation’s World Food Programme, while US non-governmental organisations will distribute another 100,000 tonnes, according to people familiar with the agreement. One US official told the Financial Times that President George W. Bush would approve the deal “within days”.

In order to ensure the food reaches ordinary North Koreans, Pyongyang has agreed to extensive monitoring, including random inspections that several observers said were “unprecedented”. It would also allow “port to mouth” inspections to reduce concerns that food would be siphoned off for the elites that support Kim Jong-il, the North Korean leader.

Pyongyang will also allow more monitors into North Korea than under previous food programmes, and will allow them to visit a greater number of areas.

North Korea will receive an initial shipment of 50,000 tonnes in early June. Once Mr Bush formally approves the deal, US experts will meet counterparts from North Korea, the WFP and NGOs to decide what kind of food is needed.

…And contrary to its previous report on 5/11/08 that South Korea was preparing to donate a nearly USD$10 million aid package to the DPRK, despite never being formally asked for it, Yohnap today reports that Seoul is doing no such thing.  The trial balloon carrying the aid must have popped somewhere over the DMZ.

Read the full stories here:
US to send food to N Korea under new deal
Financial Times
Demetri Sevastopulo
5/13/2008

Seoul set to approve 10 bln won in aid for N. Korea: official
Yonhap 
5/11/2008

Gov’t denies rice aid to be sent to N. Korea via int’l body
Yonhap
Shim Sun-ah
5/13/2008

Peterson Institute for International Economics Working Paper
May 2008
Stephan Haggard, University of California, San Diego
Marcus Noland, Peterson Institute for International Economics
Erik Weeks, Peterson Institute for International Economics

Download the paper here: haggard_noland_weeks_pb.pdf

Abstract:

North Korea is on the brink of famine. As detailed [in this policy brief], the margin of error between required grain and available supply has virtually disappeared. Local food prices are skyrocketing even faster than world prices. Aid relationships have been soured and the regime’s control-oriented policy responses are exacerbating distress.  Hunger-related deaths are nearly inevitable and a dynamic is being put in place that will carry the crisis into 2009, even if as expected, the US announces that it is sending 500,000MT in return for a signed nuclear declaration.
 
The US can provide aid in ways that maximize its humanitarian impact while limiting the degree to which aid simply serves to bolster the regime.  We know that aid is diverted.  Yet given the fragmented nature of markets in North Korea, diverted aid often finds its way into markets in the catchment area where it is delivered.  Geographically targeting aid to the most adversely affected regions and providing it in forms such as barley and millet that are not preferred by the elite can increase the ameliorative impact of assistance.  The Bush Administration has taken up the first part of this equation–requiring that most of its contribution to the World Food Program be targeted at the worst affected regions–but it could do more on the second part: providing aid in forms less preferred for elite consumption. It can also encourage others such as South Korea to follow suit.
 
The US should also exercise quiet leadership with respect to the refugee question as well. The Chinese government’s practice of returning North Korean refugees may reflect a natural self-protective response against the threat of a flood of migrants and even the breakdown of the North Korean regime; it was, after all, the notorious “hole in the fence” that helped precipitate the collapse of the Eastern European regimes. But the policy of returning refugees does not conform with China’s obligations under the refugee treaty and does not in the end serve the country’s underlying political objectives either; it simply serves to cutoff another escape valve, however small, that has contributed to taking pressure off of a rapidly deteriorating situation.

Andrei Lankov is the first in the media to construct a narrative which details the series of decisions that have led to North Korea’s current food crunch.

From his article:

Merely a year ago, North Korean leaders were optimistic. The good harvest of 2005 persuaded them that food shortages were behind them, and that North Korean agriculture had begun to recover. The 2005 harvest was merely 4.6 million tons, well below the 5.2 million tons which are necessary to keep the entire population alive. Still, it was clearly an improvement.

Lankov’s assertion that 5.2 million tons of grain are needed to sustain the DPRK population comes from the UN.  Recent work by Marcus Noland estimates that this number is closer to 4.6, although exact figuress are not possible because the actual size of the DPRK population is unknown.

In addition, for a decade South Korean administrations have maintained their Sunshine policy of unilateral concessions and unconditional food aid. Since 2000, about 450,000 tonnes of food have bee delivered to North Korean granaries from the South every year, free of charge. Its distribution was almost unmonitored. Pyongyang leaders came to believe that such aid would continue for the foreseeable future. Additionally, increasing Chinese involvement with North Korea, while not necessarily welcomed by Pyongyang, was seen as a sign that additional food would be coming – and Chinese shipments were roughly equal to those of South Korea. Finally, the basic agreement with the US on the nuclear issue was perceived in Pyongyang as a sign of Washington’s willingness to pay generously for rather minor concessions.

As noted by many besides Lankov (here), this good fortune prompted the DPRK government to reimpose elements of the planned economy which failed long ago: 

In 2005, authorities claimed that the public distribution system would be completely revived, and banned private trade in grain. This ban was generally ignored and eventually failed, but subsequent moves were more successful. In late 2006, authorities banned male vendors from the country’s marketplaces. In 2007, women under 50 years old were also prohibited from engaging in business in markets. The assumption is that every able-bodied North Korean should go where he or she belongs, specifically to the state-run factories of the Stalinist economy.

The government also staged some campaigns against semi-legal private businesses that had been tacitly tolerated since the late 1990s. After 2005, authorities successfully cracked down on the trafficking, smuggling and illegal labor migration occurring on the border with China. There was also a remarkable increase in the volume of anti-market rhetoric in the official Pyongyang propaganda.

The economic problems they were attempting to achieve at home through these policies, however, were only the first of several shocks to hit the DPRK economy in the last year: 

1. Low harvest numbers

First of all, the 2007 harvest was a failure. It was estimated at only 3.8 million tons, well short of the critical 5.2 million ton benchmark [and Noland’s 4.6 benchmark]. As usual, floods were officially blamed (as if the impoverished North does not share the same small peninsula with the prosperous South, where no signs of food shortage have been seen in decades).

2. Drop in aid from South Korea

The presidential elections of December 2007 led to a change of leadership in Seoul. The new government, led by right-of-the-center pragmatist Lee Myong-bak, said that the era of unconditional concessions to the North was over.

3. International food prices rising

The situation was aggravated by the explosive rise of international food prices. The North Korean press has reported the trend widely obviously in an attempt to,place the blame for the current crisis on factors clearly beyond the government’s control. On April 20, Nodong Sinmun, the major official daily newspaper, ran an article that described food supply difficulties worldwide and mentioned a dramatic increase on food custom duties in “certain countries”.

4. Cold shoulder from China

The worldwide price hike means that the amount of food coming to North Korea via foreign aid channels is likely to decrease. China, preoccupied with the Summer Olympic Games in August, and increasingly annoyed by North Korean antics, is not too willing to help the North out of its trouble which, as some people in Beijing believe, were brought on Pyongyang by its own stubborn resistance to the Chinese reform model.

So what is Lankov’s prediction?

In North Korea, the domestic food situation is deteriorating fast. The sudden hike in food prices seems to be a sign of deepening crisis. There were reports about farmers who refuse to toil the state-owned fields, stating that they are too weak to work (but still willing to work on their private plots). There are rumors of villagers starving to death even though observers believe the food shortage has not yet developed into a famine. If the shortage of fertilizer damages this year’s harvest, a famine may develop by the end of this year.

The political consequences are unclear. Knowledge about the situation inside North Korea remains grossly inadequate. If the past is an indication, however, nothing of great political significance will happen if a few thousand fresh graves appear in the hills of North Hamgyong province. In all probability, Kim Jong-il’s government will use its time-tested tactics: the political elite and the best units of the army will receive full rations; the residents of major cities, police and common soldiers will get barely enough to survive; and the “politically unreliable”, largely villagers from the remote northwest, will be left to their sorry fate.

There is hope the government will momentarily halt its counter-offensive against free market economics, and will ease its border controls to allow more people to China – but even such moderate measures are unlikely. Isolated revolts are possible, but the government seems to be supremely confident. After all, the disorganized, isolated population, deprived of any opportunities to organize or even communicate between themselves, is not capable of challenging the system.

Read the full story here:
North Korea stoic in the face of famine
Asia Times
Andrei Lankov
4/30/2008

Even as realtions sour between North and South Korea, the South plans to donate US$1.18 million worth of anti-malaria supplies to the North via the UN World Health Organization.

Seoul has made similar anti-malaria donations since 2001, reducing the DPRK’s malaria cases to about 7,500 last year from some 300,000 in 2001.

Read the full article here:
South Korea to provide anti-malaria supplies to North Korea
Associated Press
5/2/2008

North Korea has requested that the German Red Cross continue providing medical aid beyond ithe 2009 deadline.

The request was made when Rudolf Seiters, president of the German Red Cross, visited Pyongyang on April 22-26 and met with Kim Yong-nam, chairman of the Presidium of the Supreme People’s Assembly to discuss his group’s overrall programs to aid the communist state.

The German group has sent medical kit that includes pain-killers, antibiotics and nutritional injections, as well as medical equipment such as blood pressure cuffs and stethoscopes to some 2,000 local hospitals and clinics across North Korea since April last year. About 8.8 million North Korean residents benefited from the aid, Koch said.

The German government has provided 4 million euros (US$6.2 million) worth of aid to the North every year since 1997, the spokeswoman added.

Read the full article below:
German Red Cross asked to continue helping N.K.: report 
Yonhap
5/1/2008

On April 23, the Korea Institute for International Economic Policy (KIEP)hosted, “The Lee Myung-Bak Administration’s Policy toward North Korea: Denuclearization or Disengagement.”  In this seminar they essentially answered this question with a ‘yes’.

According to the Daily NK coverage of the event:

[Dong Yong Seung, the Chief of the Security and Economics Department of the Samsung Economic Research Institute stated,] “While economic exchange between North Korea and China has been business-to-business, in the case of Kaesong, the exchange has been controlled from a single control tower, the North Korean regime. That is, the condition has been set up for government-to-government economic exchange to facilitate North Korean government’s planned economy. Economic cooperation in the style of South Korea’s has been obstructing North Korea’s rational transformation.”

In a sense, he is arguing that South Korea’s support for the Kaesong Zone yields results more similar to foreign aid than private economic exchange.  If this is the case, South Korea, and just about everyone else, could learn from China’s strategy for investing in North Korea.

As Judge Posner put it:

All the problems that foreign aid seeks to alleviate are within the power of the recipient countries to solve if they adopt sensible policies. If they do not adopt such policies, then foreign aid is likely to be stolen by the ruling elite, strengthening its hold over the country, or otherwise squandered. What we can do for poor countries is reduce tariff barriers to their exports. With money saved from eliminating foreign aid, we could compensate our industries that would be hurt by import competition from poor countries and thus reduce political opposition to tariff reform.

Institute for Far Eastern Studies (IFES)
NK Bfrief No. 08-3-13-1
3/13/2008

International fuel and food prices are skyrocketing, while the cost of Chinese goods continues to rise, so that this so-called ‘triple-threat’ is sending shockwaves through the North Korean economy. In this year’s New Year’s Joint Editorial, North Korea championed the banner of a ‘strong and prosperous nation’, and declared that this year would focus on the economy, however this ‘triple-threat’ will likely make it extremely difficult for the North to meet its policy goals.

With oil prices peaking at over 110 USD per barrel, if these high oil prices continue, North Korea, which imports crude and refined oil from China, Russia and other countries, will face a growing import burden. In accordance with the February 13th agreement reached through six-party talks, South Korea, the United States and others will provide some heavy fuel oil, and the agreement stipulated the amount of oil to be delivered, rather than the value, so this will not be affected by rising prices. However, this oil does not cover all of the North’s needs, and as for the remaining portion, either the amount imported will have to be reduced, or the North will have no choice but to invest considerably more in fuel. In addition, as a large portion of North Korea’s oil is imported from China, Pyongyang’s trade deficit with its neighbor will also grow.

According to the Korea Trade Investment Promotion Agency (KOTRA), North Korea imported 523,000 tons of crude oil from China in 2005, 524,000 tons in 2006, and 523,000 tons last year, each year accounting for approximately 25 percent of total oil imports. North Korea’s trade deficit with China has shown a steadily growing trend, reaching 212,330,000 USD in 2004, 588,210,000 USD in 2005, and 764,170,000 USD in 2006. With grain prices also skyrocketing, and North Korea depending largely on China and Thailand for rice and other grain imports, the burden on the North’s economy is growing, and this is one factor in the instability of domestic prices in the DPRK.

According to the Chinese Customs Bureau, North Korea imported 81,041 tons of rice and 53,888 tons of corn last year, increases of 109.9 percent and 37.4 percent, respectively. North Korea’s corn, rice and oil imports from China are subject to market price controls, so that rising international prices directly affect the North’s cost burden. Last year, the price of Chinese goods rose 4.8 percent, recording the largest jump in ten years, and this trend extends to a wide variety of goods. 80 percent of disposable goods in North Korea are produced in China, and rising Chinese prices are directly reflected in North Korean import costs, which is passed on to DPRK citizens.

As North Korea emphasizes the building of its economy, it appears unlikely that residents will feel any direct effects of Pyongyang’s promise to prioritize the stability of its citizens’ livelihoods.