North Korean Economy Watch

BBC
2/3/2003

South Korean prosecutors have decided to scrap their investigation into payments made to North Korea prior to its summit with the South in 2000.

A spokesman for the prosecutors office said the investigation was being stopped in the “national interest”.

The move follows a plea from South Korean President Kim Dae-Jung, who asked prosecutors to drop the case to allow the matter to be settled in parliament.

The decision is likely to anger opposition politicians, who have accused Mr Kim’s government of being behind the money transfer, in order to gain from the summit politically.

Money transfer

The dispute centres on payments made to North Korea by the multinational conglomerate Hyundai shortly before the summit.

On 31 January investigators said the company had secretly transferred $200m to the communist North just a week before the landmark meeting.

Hyundai had borrowed the money from a South Korean state-controlled bank.

Opposition members claim the money was given as “payment” to the North for attending the summit – at the request of President Kim Dae-jung’s government.

The summit increased Mr Kim’s international standing, and contributed to his being awarded the Nobel Peace Prize in 2000.

North-South ties

On Monday President-elect Roh Moo-hyun backed Mr Kim’s appeal for a “political” settlement to the dispute.

Mr Roh “wants details of the scandal to be brought to light, but it would be better to let the National Assembly decide how to resolve the dispute,” his spokesman Lee Nak-yon said.

But the main opposition Grand National Party has said it will push for a formal investigation.

“The only way of cleansing the sin of deceiving the people is to confess frankly and apologize sincerely,” said Park Hee-tae, acting chief of the opposition.

The Hyundai group has done much to encourage links between North and South Korea.

But it has been badly affected by a joint venture tourism project with North Korea, and insisted it used the state-issued loan to improve its financial position.

Mr Kim, who has previously denied knowing about Hyundai’s dealings with the North, appeared to acknowledge them on Thursday when his spokeswoman said that the money was justified “if (it) was spent on promoting South-North economic co-operation”.

“The unique nature of South-North relations has forced me to make numerous tough decisions as the head of state,” Park Sun-Sook quoted him as saying.

BBC
1/30/2003

South Korean government investigators have said that $200m was secretly transferred from a state-controlled bank to North Korea one week before a landmark inter-Korean summit in June 2000.

The summit was seen as a boost for outgoing President Kim Dae-jung’s policy of engagement with the North, but critics have dismissed the historic meeting as cheque-book diplomacy.

The government investigators’ report was the culmination of a three-month inquiry into loans granted to the South Korean conglomerate Hyundai.

Mr Kim, who has previously denied knowing about Hyundai’s dealings with the North, appeared to acknowledge the report’s findings on Thursday when his spokeswoman said that the money was justified “if (it) was spent on promoting South-North economic co-operation”.

“The unique nature of South-North relations has forced me to make numerous tough decisions as the head of state,” Park Sun-sook quoted him as saying.

Hyundai funding

Sohn Sung-Tae, an official with South Korea’s Board of Audit and Inspection which conducted the probe, said the 223.5bn won ($200m) was part of a loan from state-run Korean Development Bank (KDB) to a Hyundai subsidiary.

The BBC’s Seoul correspondent says the investigation has been frustrated by the company, which had refused to submit financial documents.

But threatened with legal action, the company finally complied this week.

In its report, the Board of Audit and Inspection confirmed that the loans of nearly $400m to Hyundai Merchant Marine were extended one week before the historic inter-Korean summit, and that half of the amount was then transferred to the Communist State.

Opposition politicians have alleged that the money was used as a bribe to induce North Korea to take part in the summit.

The Hyundai group has funded numerous inter-Korean economic projects and has played a key role in nurturing better ties between South Korea and the isolated Communist North.

But it has been badly affected by a joint venture tourism project with North Korea, and, in deep financial trouble at the time of the summit, insisted it used the loan to improve its financial position.

South Korea’s JoongAng Ilbo newspaper quoted an aide to President-elect Roh Moo-hyun on Thursday as saying that the Hyundai firm had transferred the money to the North with the help of the government’s National Intelligence Service.

“This proves that this government’s biggest achievement, the June 15 South-North summit, was bought with money,” opposition party spokesman Park Jong-hee said in a statement.

Mr Park called on Mr Kim to apologise.

The legacy of outgoing President Kim Dae-jung’s administration has been seen as his success in improving ties with the North.

He was awarded the Nobel Prize for Peace in 2000 following the inter-Korean summit.

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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BBC
11/17/2002

North Korea has said for the first time that it has nuclear weapons.

A commentary broadcast on state radio said North Korea had developed “powerful military counter-measures, including nuclear weapons” to cope with what it called mounting nuclear threats from the United States.

Last month, Washington announced that North Korea had admitted to having a programme for producing highly-enriched uranium – a key ingredient in nuclear weapons.

But this is the first time the communist state has made such an acknowledgement.

A foreign ministry statement in October said only that the country was “entitled” to have nuclear weapons.

President George Bush has repeatedly called on Pyongyang to eliminate its nuclear programme, saying it is the only way the country can have a viable future.

The BBC’s Charles Scanlon says state media often contains hostile rhetoric and it is not clear how literally the broadcast – which was not attributed – is meant to be taken.

He says for years North Korea has tried to keep the world guessing about its nuclear capabilities.

Pyongyang’s demands

Sunday’s broadcast accused Washington of “slandering and injuring” North Korea.

America’s “reckless manoeuvres”, it said, were threatening the country’s right to existence and sovereignty.

“Under these circumstances we cannot sit idle with our arms folded,” the radio said.

It also repeated Pyongyang’s demands that the US must sign a non-aggression pact, insisting it was the only way to resolve the nuclear issue.

The timing of the broadcast fits in with a pattern of North Korean “confession”, according to Michael Yahuda, professor of International Relations at the London School of Economics and Political Science.

He told BBC News Online, it appeared they wanted to clear the way for talks.

“The US is threatening and, by responding, Pyongyang is sending out a message: ‘We have nuclear weapons as well, so lets find a way to negotiation’,” he said.

Aid stopped

The US defence secretary, Donald Rumsfeld, said last month that North Korea might have one or two nuclear weapons.

Earlier this week, the US, South Korea, the European Union and Japan agreed to halt fuel aid to North Korea until Pyongyang moved to dismantle the programme.

Under a 1994 accord, North Korea agreed to freeze its nuclear programme in return for 500,000 tonnes of fuel oil a year in aid.

But Washington considers that Pyongyang nullified the 1994 pact when it reportedly admitted to a US envoy that it was trying to build nuclear weapons.

BBC
11/15/2002

South Korea has pressed North Korea to scrap its suspected nuclear programme, welcoming a decision by the US and its allies to stop deliveries of oil to its impoverished neighbour.

Diplomats from South Korea, the US, the European Union and Japan agreed that a 42,000 tonne shipment of fuel, currently on its way to North Korea, should be the last.

The US had called for the aid to be stopped, unless the Communist regime dismantled its alleged nuclear weapons programme.

South Korea and Japan had both argued for continuing the fuel shipments over the winter, and analysts say they faced several weeks of pressure from the US over the issue.

But on Friday South Korea said it was “quite united” with its allies and “pleased” with the decision to cut off supplies.

“I hope this message will be heard by North Korea,” a senior government official told reporters.

The South Korea Deputy Foreign Minister Lee Tae-shik said the government would continue to holds talks with Pyongyang.

Deadlock

The fuel decision was announced as the allies met in New York as part of the Korean Peninsula Energy Development Organisation (Kedo), which administers a 1994 accord designed to limit North Korea’s nuclear ambitions.

Under the plan, North Korea agreed to freeze its nuclear programme in return for 500,000 tonnes of fuel oil a year in aid.

Washington considers that Pyongyang nullified the 1994 pact, after confessing to a US envoy last month that it was trying to build nuclear weapons with enriched uranium.

“Future (oil) shipments will depend on North Korea’s concrete and credible actions to dismantle completely its highly enriched uranium programme,” said the Kedo statement.

North Korea says it will only scrap its nuclear programme if the US signs a non-aggression treaty.

Both South Korea and Japan have expressed doubts that stopping oil deliveries would persuade North Korea to terminate its nuclear weapons programme.

They fear it would instead lead to a revival of an earlier, plutonium-based nuclear programme.

Time
Donald McIntyre
10/19/2002

Lee Mi Young crossed the Tumen River from North Korea into China a month ago. Now she is hiding in a safe house in China, getting help from a Chinese-Korean missionary, and hoping to start a new life. She is terrified to be talking to the first foreigner she has ever seen, more so because she is painting a negative picture of her country. She could be executed in North Korea for this conversation (Lee Mi Young is a pseudonym).

In her mid-30s, with pretty, bright brown eyes and carefully stenciled eyebrows, Lee says she left North Korea because she was tired of never having quite enough to eat. Things are better than they were during the famine of the mid-’90s, but they have begun to deteriorate since July when North Korea announced a series of economic reforms that many observers said signaled the start of a serious effort to fix the country’s collapsed command economy. The government raised the salaries of workers such as miners and teachers, increased the cost of state rations such as rice and allowed the North Korean won to fall to about 150 to the dollar, much closer to its real black-market value than the 2.5 won to the dollar at which it had previously been pegged.

Lee says that in her hometown north of Pyongyang (she prefers we don’t name it) the price of grain in the black market has risen, but people can’t afford to buy it: Although salaries have been raised, the government has only actually paid them once since July. People need to supplement meager government rations with rice bought at exorbitant prices on the black market. “This was a reform for the rich,” says Lee. “Things are worse than before.”

Kim Jung Il is still fully in control of the country, analysts say. There are periodic reports of small signs of dissent — anti-government leaflets and graffiti, for example. Some defectors say family members will complain among themselves and possibly with friends. But North Korean defectors say that everyone is aware that anybody caught protesting publicly will be sent to a harsh prison camp, where they will be joined by members of their family. Lee, the young woman who fled last month, says she saw an old lady standing in line waiting for rations in August who suddenly said: “It is so difficult to live here. I can’t stand this.” Almost immediately, a man came up, tapped her on the shoulder and led her away. Other members of her family later disappeared without explanation.

What has changed in the past few years is the amount of knowledge about the outside world flowing into the country. Hundreds of aid workers have been in and out of the country in recent years, bringing with them new ideas and information. Thousands of North Koreans have crossed across the Tumen River into China attempting to flee or simply looking for food. Many come back not only with food, but also bearing tales of the wonders of China’s booming cities and stores brimming with goods. According to one defector, Chinese-Koreans are bringing cell phones into North Korea, using them along the border and even leaving them behind for relatives to use — in a country where ordinary people don’t have landline phones in their homes.

For impoverished North Koreans, China’s flashy modern cities seem like paradise and many dream of going there. There is much more knowledge about South Korea as well. North Korean propaganda for years portrayed the South as a land of beggars oppressed by a rich elite. Many average North Koreans now know that isn’t true, according to defectors. One reason: North Korean sailors, traders and workers who have been to places like Cuba and Libya come back with video tapes of American action movies. These are secretly circulated, with eager audiences gathering at the house of the very rare family rich enough to have a VCR player, sometimes with an English-speaker on hand to translate the dialogue. A record 600 North Korea defectors arrived in Seoul last year — this year’s figure could top 1,000.

Some analysts argue the clash in the West Sea on June 29 (in which North Korea patrol boats fired on South Korea naval vessels, killing five sailors) was the work of disgruntled military leaders trying to warn Kim Jong Il to keep a lid on change. The conventional wisdom has always been that North Korea is afraid to open the door a crack because the system could unravel so quickly. Some defectors and aid workers report that there is a sense of instability and uncertainty in the country right now. Rather than the start of reform, we may be seeing a country starting to unravel already.

When I visited Pyongyang in August, it looked better than it had even six months earlier. There were open-air restaurants offering grilled meat — just like in Seoul — and people looked healthy and even vibrant. But the capital has always been an oasis reserved for party members and North Koreans loyal to the regime. Aid workers and diplomats say smaller cities lack regular electricity and people still can’t get enough to eat. They probably aren’t starving but malnutrition remains widespread.

North Koreans who live in the countryside may be marginally better-off than their urban cousins, because they are able forage for wild plants in the mountains and are allowed to grow vegetables on small private plots. Life is harsh for city dwellers dependent on the industrial economy. On the road from Pyongyang to the northeast corner of the country, you pass mile after mile of rusting factories — probably less than one third of the country’s factories are actually running.

A Korea-American businessman who visited the city of Kaesong recently was shocked to learn it had had no electricity for 10 days. The only electric lights shining at night in Kaesong those illuminating monuments to the late “Great Leader” Kim Il Sung. Many city have electricity at certain times of the day. Foreign reporters who visited Shinuiju last month, for the unveiling of a plan to turn it into a free economic zone designed to lure investors, were struck by the contrast with the neighboring Chinese city of Dandong. Dandong at night is a blaze of lights; across the river, Shinuiju is in near-total darkness. Apartment blocks in Pyongyang are lit at night these days, but there are few lights outdoors — except, of course, those illuminating the gigantic statue of the “Great Leader.”

To make a go of “special economic zones” such as Shinuiju, North Korea needs to massive foreign investment to rebuild its electrical grid and other key infrastructure. The country has never been self-sufficient in food and needs an industrial economy to make fertilizer to boost agricultural yield and to finance food imports to make up the shortfall. But the disappearance of foreign subsidies following the collapse of the Soviet Union saw a rapid de-industrialization — until the late 1960s, it had been ahead of South Korea economically. North Korea is now dependent on international food aid and donations of fertilizer, and desperately needs to get on the right side of the U.S. in order to get the loans it desperately needs from the World Bank — loans that the U.S. is now blocking. That has many South Korean analysts suggesting that the reason Pyongyang sudden nuclear confession is precisely that it hopes to put its nuclear weapons program on the table and trade it away for economic gains and security guarantees from Washington.

UN PAN
Bertil Lintner
Suh-Kyung Yoon

Pak Ku Po and his companion would not make it in international business circles.  They have no name cards and one of them does not even want to give his name. They claim they know nothing about the place where they are based–“we’re just newcomers here”–but promise to be more forthcoming “the next time we meet.”  Their secretiveness is perhaps understandable as they work for Zokwang Trading, a state-owned North Korean company in Macau, which in the past has been accused of being involved in the distribution of counterfeit money, arms smuggling and terrorist training. North Korea had been accused of state-sponsored terrorism long before Afghanistan decided to give shelter to Osama bin Laden and the seeds of the present conflict in Central Asia were sown.

But now things are supposed to have changed, and Zokwang and other North Korean trading companies–and there are many of them throughout East Asia–claim they are legitimate business operations. Pak, for instance, says that Zokwang is involved mainly in the export of North Korean ginseng to Asian countries, and sweaters and other knitwear to France and Canada. Over the past few years, North Korea has embarked on a vigorous commercial drive across the globe, and, for the first time, it is making serious attempts to attract foreign investment. Is Pyongyang finally turning to capitalism to save the world’s last Stalinist state?

The main question is whether this change in attitude will, in the long run, also change North Korea’s economy and society–as similar initiatives by the Chinese communists in the late 1970s have begun to transform China. Or will more hard currency in the state’s coffers only serve to delay the collapse of one of the world’s most atavistic regimes, thus prolonging the suffering of the North Korean people? And have North Korean businesses overseas really become legitimate? Or are they still peddling fake bank notes, drugs and ballistic-missile technology? This is an important issue going forward because the United States has made it clear it will track down all sources of funding for terrorists in future–and now that other sources are drying up,lesser-known alternatives may come into vogue.

There is little doubt that the sale of ballistic-missile technology in violation of the Missile Technology Control Regime and, more generally, the export of weapons to terrorist organizations and the states that harbour them, is far more lucrative than all of Pyongyang’s legitimate commercial ventures put together. But it is equally true that the international war on terrorism will only make such sales more difficult with every passing day.

Ri To Sop, North Korean consul general at the recently established diplomatic mission in Hong Kong, is firm in his assurances. “Our Dear Leader has told us that this is a new millennium, and that we should not do things in the old way. There will be changes. Just wait and see,” he says. The “Dear Leader,” North Korea’s reclusive supremo, Kim Jong Il, visited China in May this year, where his hosts took him to see the stock exchange in Shanghai. In July, he embarked on a 10-day epic train journey through Siberia to Moscow and St. Petersburg, where he visited sites commemorating the 1917 communist revolution, but also held talks with Russia’s new, born-again capitalist leadership. The trip was hailed by South Korean Foreign Minister Han Seung Soo: “[This is] a very positive development because it is an indication that North Korea is willing to open up.”

The main force behind North Korea’s commercial drive is, perhaps not surprisingly, the country’s powerful military. In June, a North Korean defector described the North Korean People’s Army as the country’s biggest “foreign-exchange earner.” From early spring this year, servicemen have been made to engage in a variety of export-oriented projects including mushroom harvesting, gold mining, medicinal-herb collection and crab fishing.

The ruling Korean Workers’ Party is also reported to be operating more than 40 restaurants in six countries as a means of raising hard currency. The first North Korean eatery opened in Austria as early as in March 1986, but in recent years more have followed in China, Russia and Indonesia. According to South Korean intelligence, North Korea will soon open restaurants also in Bulgaria and Australia.

Even more imaginatively, the Dongkong Foreign Trade Corporation in the Chinese city of Dandong, just across the border from North Korea, acquired in September the exclusive right to sell North Korean medicines in the international market–including a brand called Cheongchun No. 1, which is a home-made North Korean version of Viagra.

EFFORTS PAYING OFF
In Thailand, a North Korean-owned company, Wolmyongsan Progress Joint Venture, has for years been engaged in mining activities near the Burmese border in Kanchanaburi, west of Bangkok, while Kosun Import-Export, which is based in the Thai capital itself, is permitted to trade in rice, rubber, paper, tapioca and clothing.  Kosun is located in a discreet office on the top floor of an eight-storey building in a Bangkok suburb. The company is also involved in property, apparently owning the building and renting out flats and office space.

At first glance, it seems that North Korea’s dive into the world of capitalism is paying off. North Korea does not release any trade or economic figures, but according to data collected by South Korea’s state-run Korea Trade-Investment Promotion Agency, or Kotra, from the North’s main trading partners–China, Japan, Thailand and Hong Kong–its external trade in 2000 jumped by 33.1% to $1.96 billion from a year earlier.  It was the second straight year that North Korea saw its trade volume expand and that, too, at a much higher rate than the modest 2.6% increase in 1999.

Kotra is now actively promoting more trade with North Korea. In April this year, the agency published a fact book on how to do business in the Stalinist state, complete with useful phone numbers in Pyongyang and the complete text, in English, of all new laws relating to foreign trade and investment. South Korea’s interest in the development of the impoverished north is understandable. Since South Korean President Kim Dae Jung undertook his historic journey to Pyongyang in June last year, the question of a reunification of the Korean peninsula has become much more urgent–and the South Koreans are painfully aware of the wide income gap between the North and the South.

“Unless we help North Korea develop and strengthen its economy, both countries would collapse if they were reunited,” says a South Korean diplomat on condition of anonymity. “The South would not be able to take care of the North. The gap is just too wide today.” The cost of reunification was first discussed in South Korea shortly after East and West Germany–at a tremendous price–became one country in 1990. According to Marcus Noland, a researcher at the Institute for International Economics, Washington, South Korea would have to invest as much as $3.17 trillion in order to avoid an abrupt influx of people to the South and to upgrade living standards in the North–significantly more than West Germany had to pay to raise living standards in East Germany to an acceptable level.

A closer look at Kotra’s upbeat trade figures for North Korea also reveals a somewhat less rosy picture. In 2000, North Korea exported $556 million worth of machinery and chemical goods–while importing $1.4 billion worth of food, computers and vehicles. The North’s perennial trade deficit is expected to worsen this year as the country has to increase imports of rice, corn and other grains. According to the Bank of Korea, North Korea’s foreign debt totals $12.3 billion and Pyongyang’s credit rating is the lowest in the world.

There is no doubt that it is the dire straits that North Korea has found itself in which have forced its government to resort to commerce, not any real change of mind in the inviolability of the country’s austere socialist system. According to a study by Heather Smith and Yiping Huang of the Australian National University, the present food crisis in North Korea was caused by the disruption in trading ties with former communist allies in the late 1980s. The former Soviet Union ceased providing aid in 1987. More devastatingly, they emphasize, both the former Soviet Union in 1990 and China in 1993 demanded that North Korea pay standard international prices for goods, and that it pay in hard currency rather than through barter trade, as previously had been the case. This affected petroleum imports to the degree that they declined from 506,000 tonnes in 1989 to 30,000 tonnes in 1992.

Subsequently, North Korea embarked on its overseas capitalist ventures. According to a Western diplomat who follows developments in North Korea, the country’s embassies abroad were mobilized to raise badly needed foreign exchange. This, he says, was done partly in the name of the diplomats themselves, or through locally established trading companies, which in reality are offshoots of bigger, Pyongyang-based state trading corporations. “Not only do the embassies have to be self-sufficient, they are also expected to send money back to the government in Pyongyang,” the diplomat says. “How they raise money is immaterial. It can be by legal or illegal means. And it’s often done by abusing diplomatic privileges.”

The sad truth is that the North Koreans are desperate and prepared to do anything to make money, and Bangkok seems to be emerging as a centre for many of their activities. Western intelligence officials based in the Thai capital are aware of the import and sale of luxury cars, which are brought in duty-free by North Korean diplomats. Another way of raising money is to insure a cargo consignment at a disproportionate level, and then report the goods lost. “This is usually done through international insurance markets, and there is little the companies can do but to pay up,” the diplomat says.

And earlier this year, fake $100 notes turned up in Bangkok. The police believed that the North Korean embassy was responsible as some of its diplomats were caught trying to deposit the forgeries in local banks. The North Korean diplomats were warned not to try it again. In a more novel enterprise, the North Koreans in Bangkok were reported to be buying second-hand mobile phones–and sending them in diplomatic pouches to Bangladesh, where they were resold to customers who cannot afford new ones.

And even where businesses tend to be more legitimate, North Korea has managed to attract some rather unusual investors. As early as 1991, the North Koreans established a “free economic and trade zone” in Rajin-Sonbong along the Tumen River near the border with China and Russia. Some 746 square kilometres were set aside for “foreign capitalists”–but there have been very few takers apart from pro-Pyongyang ethnic Koreans from Japan, who have invested because of patriotic duty rather than any expectations of quick returns. In fact, there is only one major foreign investor in the entire zone: Hong Kong entrepreneur Albert Yeung Sau Shing, who controls the Emperor Group, which has interests in gold, securities, property and entertainment in Hong Kong and China as well as a banking venture in Cambodia.

In October 1999, Yeung opened the $180 million Seaview Casino Hotel in Rajin-Sonbong. Although locals are banned from entering the establishment, the Emperor Group is betting that wealthy Chinese and Russians will come there to gamble. The casino has 52 slot machines and 16 gaming tables offering everything from blackjack and baccarat to roulette. In Hong Kong, Yeung is best remembered for his acquittal at his dramatic trial for criminal intimidation in 1995 when all five witnesses called by the prosecution testified that they did not remember anything. Yeung was accused of having kept a former employee prisoner after threatening to break his leg. Even the victim himself said he could not remember what had happened.

In the same year, Macau gambling tycoon Stanley Ho also opened a casino in North Korea, but in the capital itself. Ho’s $30 million Casino Pyongyang is located in the Yanggakdo Hotel, where his partner is Macau businessman Wong Sing-wa. His company, the Talented Dragon Investment Firm, in 1990 became Pyongyang’s unofficial consulate in Macau with authority to issue North Korean visas.

Wong, who has interests in several Macau casinos, made headlines in early 1998, when a Lisbon-based weekly newspaper, the Independent, protested over his presence in a delegation from Macau that was being received by the Portuguese president. The paper cited a Macau official as saying that Wong had “no criminal record, but we have registered information that links him to organized crime” in Macau.

With such business partners, it is obvious that the North Koreans have a long way to go before they acquire a better understanding of how capitalism really works. Nor has North Korea, despite its efforts, managed to attract a large number of new investors.  In July this year, a delegation of representatives from 17 Hong Kong companies went to North Korea on a trip initiated by the new consulate in the special administrative region. But though they showed some interest, no commitments were made.

LITTLE BUSINESS INTEREST
In October, the Singapore Confederation of Industry sent a 25-member delegation to North Korea to look into business opportunities, but little investment is expected from there as well. In recent years, only one Singapore company, Maxgro Holdings, has concluded a joint-venture agreement with North Korea. Maxgro intends to plant 80 million paulownia trees on 20,000 hectares of state-owned land and the project is meant to produce wood for furniture, veneers and musical instruments. But at a value of only $23 million, it is hardly going to turn things around in North Korea.

And, as the fake dollars in circulation in Bangkok show, old habits die hard. In fact, North Korea’s main export item remains ballistic-missile technology. There are especially two North Korean companies that have attracted the attention of Western diplomats: the Changgwang Sinyong Corporation and the Lyongaksan General Trading Company.

In the 1990s, Changgwang was sanctioned by the U.S. government for exporting ballistic-missile technology to Pakistan. In July this year, Changgwang was once again sanctioned by Washington, this time for providing Iran with the same technology. According to Western diplomats, Lyongaksan, which like Changgwang is controlled by the North Korean military, sends people under commercial cover to countries such as Syria and Libya, where they in reality sell weapons systems. According to a report which the Seoul-based Korean Institute for Defence Analyses released in April, North Korea has exported at least 540 missiles to Libya, Iraq and other Middle East countries since 1985.

Libya recently bought 50 Rodong-1 missiles with a range of 1,000 kilometres. Cash-starved North Korea has not hesitated to sell weapons to whoever wants to buy them, including terrorist groups. A video of an attack last year by the Liberation Tigers of Tamil Eelam on a Sri Lankan navy vessel shows speedboats which appeared to be of North Korean origin. The rebels also appeared to be using a North Korean variant of the Russian 107 millimetre Katysha rocket launcher. And in late 1990, North Korea sold Burma 20 million rounds of 7.62 millimetre rifle ammunition, which intelligence sources say ended up in the hands of the United Wa State Army, a drug-trafficking group which is active in the Burmese sector of the golden triangle.

While the world is focusing on the terrorist threat from Afghanistan, North Korea’s potential for mischief has been almost overlooked. But in testimony on April 17 this year, Deputy CIA Director John E. McLaughlin warned: “North Korea’s challenge to regional and global security is magnified by two . . . factors . . . first the North’s pursuit of weapons of mass destruction and long-range missiles, and its readiness–and eagerness–to become missile salesman to the world. And second, the economic and humanitarian disaster that has afflicted the people of the North–a catastrophe whose effects will endure for generations, no matter how the Korean situation finally plays out.”

Unlike North Korea’s more mainstream trading companies, its sale of ballistic-missile technology and military hardware raises millions of dollars, which–minus commissions for the North Korean “businessmen” in the field–flow back into Pyongyang’s coffers. “There is no evidence to suggest that this money is used to put food upon the tables of North Korea’s starving people,” quips a Western diplomat.

North Korea, which depends on international aid to feed its people, has imported $340 million worth of military hardware over the past decade, according to South Korean security officials. This may be less in absolute terms than what South Korea spends on its military. But the much-poorer North spends 14.3% of the country’s GDP on its military compared to the 3.1% spent by the South.

So, for the time being, missiles rather than mushrooms make up the backbone of the North Korea’s exports. If some capitalist seeds have been sown during the present drive to shore up the economy, it will take some time for a new business mentality to emerge. Kim Jong Il, it seems, is not yet about to become another Deng Xiaoping.  But in a world ever more concerned with the spread of biological, chemical and nuclear weapons, states that are known, or suspected, to possess them will find themselves facing intense scrutiny–if not outright isolation. North Korea, thus, has very good reason to come in from the cold.

UNFAO
11/13/1997

Despite an improved harvest in North Korea, the country will enter 1999 with a large food deficit and will need to import 1.35 million tonnes of food grain, including 1.05 million tonnes as food assistance to meet the minimum nutritional requirements of the population, according to a joint report by the UN Food and Agriculture Organization (FAO) and the UN World Food Programme (WFP).

The report, based on the findings of a crop and food supply assessment mission that toured the country extensively last month, forecasts North Korea’s cereal production for 1998/99 at 3.5 million tonnes, some 30 percent higher than last year’s severely reduced crop.

But this harvest is only enough to cover minimum consumption needs for eight months. Apart from foreign exchange constraints that limit commercial imports, the general economic decline in the country and natural disasters have seriously compromised national food security.

“The food situation in DPR Korea (North Korea) remains precarious and the country urgently needs to address the underlying problems in the economy and agriculture if it is to avert serious problems in the future,” said the assessment team leader Mr. Abdur Rashid.

The report recommends that out of the 1.05 million tonnes of food aid needed, some 480,000 tonnes be targeted mostly to children, hospital patients and pregnant and nursing women. The remaining cereal shortfall of 574,000 tonnes will be needed to help the general population meet its minimum needs.

The report calls for immediate attention to be “focused on improving agricultural input supplies, mainly fertilisers, spare parts and fuel” to “enable the country to produce enough food to meet its minimum needs.”

“It is imperative that the international assistance to agriculture be increased substantially from its current low levels,” the report said, because “future food security in DPR Korea (North Korea) will crucially depend on solutions that address the major economic difficulties. In the absence of these, even without natural hazards, the food supply situation will remain highly precarious as the productivity in agriculture falls and the capacity of the country to finance commercial food imports dwindles and barter trade becomes a progressively less viable option.”

“Despite favourable weather this year, food production has not recovered sufficiently enough to avert serious food shortages,” said WFP’s Senior Program Coordinator for North Korea, Mr. Saeed Malik, adding, “The food crisis has been compounded by a complete run-down of the country’s economy.”

The natural disasters that struck North Korea from 1995 to 1997, including two years of flooding followed by serious drought and a typhoon, aggravated the underlying structural problems of the economy. The situation worsened further with the loss of favourable economic ties with the former USSR and other centrally planned economies in eastern Europe which had provided North Korea with large amounts of aid and trade benefits.

Today, the agriculture sector faces a lack of spare parts for broken machinery, shortages of fuel, irrigation difficulties and a shortage of pesticides. But, the shortage of fertiliser is the most serious problem for domestic food production, according to the report. North Korea’s three fertiliser factories have a total capacity of over 400,000 tonnes of nitrogen nutrient which could be enough for self-sufficiency, but the factories are obsolete, poorly maintained and face shortages of spate parts and raw materials, mainly fuel, causing fertiliser availability for 1998 to dwindle.

“The capacity of North Korea to provide adequate food for its population is constrained by the shortage of agricultural inputs such a fuel and fertiliser needed to produce food domestically and the reduced capacity of the economy to supplement domestic food production through commercial imports,” said the report, adding: “Food security in the country critically depends on general economic performance and the efforts to increase domestic food production.”

Other recommendations in the report include:

· Rehabilitation and development of the irrigation system and improved water management;

· Crop diversification to enhance soil productivity and reduce risk of crop losses in any one year due to adverse weather conditions;

· Research into effective crop rotation schemes including legumes to promote soil fertility and productivity; and,

· Research on seed improvement, and early and short-maturing and less chemical fertiliser dependent crop varieties.

· In the context of these recommendations, the UN Development Programme-led Round Table in support of Agricultural Recovery and Environmental Protection is an important initiative towards a strategic approach.

UNFAO
11/9/1997

The nutritional situation in North Korea remains fragile in spite of the country’s efforts to redress chronic food problems, United Nations food agencies said today in their latest comprehensive food assessment report.

“Given the scale of the problem and its root causes, future food supply prospects are almost entirely contingent on international food and rehabilitation assistance, economic growth and the ability of the country to integrate itself into the global economy,” the Food and Agriculture Organization (FAO) and World Food Programme (WFP) said in a report on their recent joint mission to North Korea.

“Failing these requisites, food availability and health and nutritional standards will continue to fall markedly,”

Living standards in North Korea have significantly declined in the last four years as the availability of food per person has shrunk, while serious health problems have increased because resources, drugs and essential supplies are unavailable. A vicious circle of poor nutrition compounding poor health and vice versa has become deeply entrenched, the report said.

“Widespread starvation has only been averted by concerted national efforts and the unprecedented volume of humanitarian food assistance provided by the international community,” according to the report.

The mission, which visited North Korea 9-19 October, said the food supply situation “will remain precarious over the next 12 months despite some improvement in rice production this year, due principally to increased fertiliser use, adequate irrigation supplies and the absence of serious pest and disease attacks.”

However, the report cautioned, the gains in rice production were more than offset by the reduction in maize output as the area cultivated fell sharply.

Based on population figures provided by North Korea’s government, grain demand for food and other uses for 1999/2000 is said to be 4.76 million tonnes. This leaves a deficit of about 1.29 million tonnes, of which the government is expected to import 300,000 tonnes commercially. A further 370,000 tonnes is covered by food aid imports in the pipeline, leaving 623,000 tonnes of grain that will need to come through assistance programmes. The food deficit has not significantly changed since the last year’s FAO/WFP crop and food supply assessment mission to North Korea.

According to the FAO/WFP report, there are signs that economic sanctions on North Korea by leading industrialized countries may be further relaxed, which could lead to recovery in the economy and rehabilitation in agriculture. “This inevitably will have a significant and positive impact on sustainable food security.”