Archive for the ‘Economic reform’ Category

When food and politics collide

Sunday, April 13th, 2008

News of the DPRK’s food shortages began to surface several weeks ago when Good Friends reported:

North Korea’s chronic food shortage has worsened to affect even some of the country’s elite citizens in the capital, a South Korean aid group said Thursday.

The communist nation has not given rice rations to medium- and lower-level officials living in Pyongyang this month after cutting the rations by 60 percent in February, the Good Friends aid agency said in its regular newsletter.

Pyongyang citizens are considered the most well-off in the isolated, impoverished country, where the government controls most means of production and operates a centralized ration system. Only those deemed most loyal to Kim Jong Il’s regime are allowed to live in the capital.

The food situation is more serious in rural areas, with residents in many regions in the country’s South Hwanghae province living without food rations since November, the aid group said. (AP)

Why was this the case?

Floods last August ruined part of the main yearly harvest, creating a 25 percent shortfall in the food supply and putting 6 million people in need, according to the U.N. World Food Program.

Over the winter, drought damaged the wheat and barley crop, according to a recent report in the official North Korean media. That crop normally tides people over during the summer “lean season” until the fall harvest.

North Korea’s ability to buy food, meanwhile, has plunged, as the cost of rice and wheat on the global market has jumped to record highs, up 50 percent in the past six months.

China also appears to have tightened its food squeeze on North Korea for domestic reasons. In order to meet local demand and control inflation, Beijing slapped a 22 percent tariff on grain exports to the North. (Washington Post)

So North Korea’s domestic agricultural production has fallen and so have commercial food imports (international inflation, OECD government subsidies for bio-fuels, and increasing fuel prices have combined to raise the prices of commodities such as rice and pork up to 70% in the course of a year). 

Compounding this problem, however, agricultural aid from North Korea’s two most reliable benefactors (China and South Korea) has dried up.

[China] has quietly slashed food aid to North Korea, according to figures compiled by the World Food Program. Deliveries plummeted from 440,000 metric tons in 2005 to 207,000 tons in 2006. Last year there was a slight increase in aid, but it remained far below the levels of the past decade. (Washington Post)

And strained relations with the new Lee government in South Korea have not helped:

The South typically sends about 500,000 tonnes of rice and 300,000 tonnes of fertiliser a year. None has been sent this year and without the fertiliser, North Korea is almost certain to see a fall of several tens of tonnes in its harvest (Reuters)

So what will be the mitigating factors that prevent another humanitarian emergency?

“The reason for the mass starvation that occurred in late 90s is that North Korea faced natural disasters without expanding the market’s capability to substitute for the broken planned economy capability, and so the damage to North Korean citizens was inevitably large.”

“The market in North Korea has expanded in the last 10 years. The supply and demand structure of daily necessities, including food items, has been formed.”

“Because the market capacity has expanded, the possibility of a mass-scale starvation occurring is no longer high. In actuality, the change in food prices is being monitored at the market.”

-Dong Yong Seung, the Samsung Economic Research Institute’s Economic Security Team Chief, speaking at the 19th Expert Forum sponsored by the Peace Foundation (Daily NK)

Mr. Dong’s analysis addresses the improved efficiency of DRPK’s market supply chains but does not address the effects of an adverse supply shock. 

The UN seems ready to help, although it has not been asked:

Institutionally, mechanisms are in place in North Korea to ring the international alarm bell before hunger turns into mass starvation. The World Food Program monitors nutrition in 50 counties, and the Kim government has become expert in asking for help.

“The North Koreans know that they are facing a difficult situation and have made it increasingly clear in the past few weeks that they will need outside assistance to meet their growing needs,” the U.N. official said, asking not to be identified because of the sensitivity of the issue.

North Korea, which even with a good harvest still falls about 1 million tonnes, or around 20 percent, short of what it needs to feed its people, relies heavily on aid from China, South Korea and U.N. aid agencies to fill the gap.

The UN official said it was clear from a variety of sources that the food security situation was worsening in North Korea and that it needed to be addressed.

Last month Kwon Tae-jin, an expert on the North’s agriculture sector at the South’s Korea Rural Economic Institute told Reuters that if South Korea and other nations did not send food aid, the North would be faced with a food crisis worse than the one in the 90s.

The U.N. Food and Agriculture Organisation said in late March it sees the North having a shortfall of about 1.66 million tonnes in cereals for the year ending in October 2008.

The North will start to feel the shortage the hardest in the coming months when its meagre stocks of food, already depleted by flooding that hit the country last year, dry up and before the start of its potato harvest in June and July. (Washington Post)

The UNWFP, however, will be under pressure from its donors to monitor food aid and make sure it is not diverted to non-emergency uses.  Under these conditions, it is not likely that they will be asked to provide much aid until a catastrophy is already underway.  So with the UN out of the picture, who is best positioned to prevent the reemergence of a humanitarian crisis in North Korea today? China.  

Despite China’s own food probelms, however, it is always likely to capitulate, at least in part, to North Korea’s emergency requests.  China does not want to deal with another North Korean famine, particularly during the Olympic season, and they certainly do not want to deal with any political instability that could result. 

Yonhap reports that the DPRK has asked the Chinese for 150,000 tons of corn this year.  Chinas says they will give 50,000 tons–and that is just initially. (Yonhap)

UPDATE 4/14/2008: I still have not seen any reports in the media of Noth Korea seeking suport from Russia.

UPDATE 6/9/2008: China increases grain export quota to North Korea to 150,000 tons

(more…)

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North Korea home brews…

Wednesday, April 9th, 2008

Where do North Koreans get their alcohol?  The Daily NK has the scoop:

North Korean citizens started producing/distributing home-brewed liquor in 1987 after the prohibition of the production and sale of liquor in North Korea was lifted. 

Liquor made in the home of an average North Korean citizen consists of ingredients such as corn or rice and malt. The yeast cultivated from rice powder is combined with porridge prepared from the powder and fermented in a vat. After 12~14 days, the rice porridge and the yeast will produce a chemical reaction and will turn into a thick porridge, which is called “liquor porridge” in North Korea.

Refrigerating the steam from the cultivated liquor porridge and turning it into fluid produces liquor. North Korean citizens enjoy over 40% of alcohol content-liquor and approximately 800ml of liquor is produced from a kilogram of corn. A bottle of liquor (500 ml) is close to the price of a kilogram of corn, so selling liquor made from this produce can bring in a small profit.

Read the full story here:
North Korea’s Inspection of Home-Brewed Wine by the Party
Daily NK
Jung Kwon Ho
4/9/2008

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Haggard-Noland on North Korea’s economic integration

Tuesday, April 8th, 2008

Stephen Haggard and Marcus Noland published a piece focusing on North Korea’s economic integration.  Download it here: petersoninstitute.pdf

Although not the focus of the piece, here is an excerpt:

A first corollary of the injunction to avoid top-down approaches is that any collective development assistance must be extended in support of economic reform. Experience throughout the developing world demonstrates that assistance will have only marginal effects and may even have negative consequences if not coupled with policy changes. It is not simply that aid sustains the regime; since aid is fungible, even purely humanitarian aid will have that effect. The problem is that too much aid can delay or even undermine the reform process. Whatever the multilateral mechanism that ultimately emerges, it should encourage reform and economic opening in the North.

A second corollary of the injunction against top-down approaches is the importance of engaging the private sector: through trade, foreign direct investment, private capital flows (including remittances), and sheer expertise. Economic rehabilitation will require investment in social overhead capital, which will be led primarily by the public sector. But if North Korea is to evolve toward a self-sustaining market-oriented economy, private-sector involvement will be crucial. Participation of foreign firms means that projects are subject to the market test of profitability, and it encourages North Korean authorities to think of economic engagement in terms of joint gain rather than as political tribute.

(and)

North Korea is in need of depoliticized technical assistance for a whole panoply of issues running from the mundane but critical, such as developing meaningful national statistical capabilities, through basic agricultural and health technologies, to social infrastructure of a modern economy. This infrastructure includes policy mechanisms to manage macroeconomic policy, including through reform of the central bank; specify property rights and resolve commercial disputes; regulate markets, including financial markets as they emerge; establish and implement international trade and investment policies; and so on.

Read the full paper here:
A Security and Peace Mechanism for Northeast Asia: The Economic Dimension
Staphen Haggard and Marcus Noland
Peterson Institute Policy Brief
April 2008

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North Korean businesses expanding in Russia

Saturday, April 5th, 2008

From the Donga Ilbo:

A black Benz with the red license plate of “087” passed by quickly. 087 is a number used exclusively for the sedans of North Korean diplomats. It was easy to tell that the North Korean embassy located on this street recently purchased the luxurious sedan.

“The North Korean embassy has been full of life since the latter half of 2006 because of the increased number of North Korean workers sent to Russia, diversified businesses and growing efforts to secure energy supplies,“ said North Korean defectors that the Dong-A Ilbo report team met in Moscow.

North Korean workers will construct the next APEC forum venue:

In order to prepare for the APEC, the Primorsky regional government (on the North Korean border) plans to issue work permits to 12,000 North Korean workers in 2008, four times higher than the number of those last year. A foreign national, who has hired North Korean workers, said, “North Korean senior officials are lobbying fiercely in order to increase the quota for laborers. They even arrange free tours of North Korea for Russian government officials.”

North Korea companies revived:

Recently, North Korean companies, such as Daedong River, Neungra, Baekdu and Goonpyo, have established their offices in many parts of Russia.

A 39-year-old North Korean defector who has stayed in Russia for 12 years said, “I believe, out of the 49 Russian provinces, North Korean firms have established their offices in about 30 provinces. Some 90 percent of them are responsible for overseeing North Korean workers.”

Joint ventures between Russia and North Korea, which went into hibernation after the United States froze North Korea’s account at Macau’s Banco Delta Asia in 2005, have recently resumed their activities. “Joint companies, which were active in the early 1990s, such as Dongbang Seafood and Far East Marine Transportation, have resumed their businesses,” said one Korean-Russian residing in Nakhodka.

Wages and Taxes:

“North Korean companies, which are spread across Russia, have been collecting about $400 to 500 from each North Korean worker every month. It is then used as high ranking officials’ business expenses,” said a 46-year-old North Korean defector.

“The discontent of workers is growing because high ranking officials dine out at fancy restaurants and their wives purchase expensive clothes with money earned by them,” added the defector.

(Uncle Sam is the only other government I know of that also taxes the income its citizens earn outside of its territory)

The story also makes a big deal out of the fact that the North Koreans pay huge bribes to do business in Russia, but who doesn’t?

Big players, who deliver a large sum of bribes to Russians, have also recently emerged. A captain of a North Korea freight ship was caught March 12 on site while shipping 100 tons of crude oil without reporting to customs at the Slavyanka shipyard, southern Vladivostok. It was found that the captain gave $45,000 to the president of the crude oil storage company as a kickback.

Read the full sotry here:
N.Korea’s Businesses Thriving in Russia
Donga Ilbo
4/4/2008

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Scrap metal smuggling rampant in North Korea

Friday, April 4th, 2008

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-4-4-1
4/4/2008

As smuggling scrap metal across the DPRK-PRC boarder has become widespread among North Korean residents lately, police are investigating the illegal trade, leading to the arrest of all of the residents in the border region that were involved in the smuggling. On April 1, the Daily NK quoted a source inside North Korea reporting that a group was arrested while transporting six tones of scrap metal to smuggle out to China via the highway connecting Yanggang Province’s Kabsan Town and Hyesan City, and subsequently imprisoned.

Those arrested were from ‘Unit 8’, an office in Hyesan under the direction of the People’s Trading Bureau regional office tasked with delivering and selling gold, food, oil and other goods in China and returning with materials needed in the North.

According to the source, “An order was handed down by the central government at the beginning of March to ‘come down hard on those scrap metal smugglers’, and the police and security force investigation is ongoing.” The source went on to report that in the Kumsandong Fertilizer Factory in Hyesan, “everything metal that wasn’t bolted down is gone, and only the walls of the factory remain…in the future [authorities] will punish scrap metal smugglers severely.”

It appears that scrap metal smuggling began to become popular in 2004, but these days, in the border areas, starving soldiers are using military vehicles to buy scrap metal from regions further from the border, then selling them in the Hyesan-Jangbaek border region. In the Yanggang and North Hamkyung Regions of North Korea, famine first spread in the mid-1990s, at which time emerged the presence of smugglers who quietly amassed copper, aluminum, nickel, and other metals and sold them in China. In response, North Korean authorities attempted to crack down, using public firing squads as a deterrent, but as border guards were in the pockets of smuggling residents of the border region, they became implicated in the cross-border illegal trading, and the crack downs became effectively useless.

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South Korean firm gets exclusive rights in Nampo

Tuesday, April 1st, 2008

Acheon Global Corp.  has obtained the exclusive right to use the Ryongnam Ship Repair Factory in the western port city of Nampo

The right to enable the firm to gain domestic and overseas investment in its ship repair and steel-structure manufacturing businesses in North Korea, Acheon officials said.

According to KCNA (12/29/2006), the site has been recently refurbished:

The Ryongnam Ship Repair Factory of the Democratic People’s Republic of Korea has been reconstructed on an expansion basis. The factory successfully constructed a large dock, three wharves to repair big cargo ships, a combined repair workshop, an acetylene generating workshop, oxygen generating workshop, a heavy oil power plant, a wind and solar power station over the last four years.

The newly built Dock No. 2 can repair several ships of tens of thousands of tons simultaneously.

The repair processes are automatized and controlled by computer. There are in the dock a horizontal jib crane, gantry crane and general control room. It is divided into the main sluice, operated by computer, and the middle one.

The combined repair workshop which covers the floor space of over 17,000 square meters specializes in making ship-body pipes while repairing propellers and power system.

The acetylene generating workshop does not produce any industrial spent water.

The wind and solar power station turns out stabilized electricity for the general control room, dwelling houses and cultural welfare facilities. Its expansion on a modern basis has consolidated the material and technical foundation for developing water transport.

Read the full article here:
Local firm to use N.K. ship repair yard
Yonhap
3/23/2008

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Escalation run down (and reasons not to panic)

Monday, March 31st, 2008

The DPRK is sending a barrage of signals that it is not happy with the policy changes that are on the new South Korean government’s agenda (denuclearize and account for all nuclear activities, reform, repatriate missing South Korean citizens, etc):

1. February 25, 2008: the DPRK increases fighter jet maneuvers near the DMZ. (Source: N.K. flight maneuvers rise near border, Korea Herald, Jin Dae-woong
4/1/2008

2. March 27, 2008: the DPRK expels eleven South Korean officials from industrial zone. (Source: South Koreans kicked out of North Korea’s Kaesong industrial centre, The Times of London, Leo Lewis, (3/27/2008)

3. March 28, 2008: the DPRK test fires missles off its coast. (Source: North Korea sends a missile warning, Asia Times, Donald Kirk, 3/29/2008)

4. March 30, 2008: the DPRK issues blunt statements about deteriorating relations and suggesting complete destruction of the South if it is attacked. (Source: Pro-North Korea newspaper says relations with South at lowest since after nuclear test, Associated Press, 3/31/2008)

5. April 1, 2008: The DPRK breaks its silence on direclty challenging South Korea’s new president, labeling Lee Myung Bak a “traitor” and a “sycophant toward the U.S.” (Source: North Korea Calls South Korean President a `Traitor’, Bloomberg, 4/1/2008)

6. April 3, 2008: North Korea accuses the South Korean Navy of violating its territorial waters, “The South Korean military’s warmongers have sent three battleships deep into our territorial waters in the West Sea (Yellow Sea) at around 11:45 am (0245 GMT) on April 3,” and “South Korea’s military should clearly bear in mind that an unexpected countermeasure will follow if they continue to push battleships into (our waters) and raise tensions.” (Note here they are trying to pin the military escalation on South Korea) (Source: North Korea accuses South of entering its waters, Reuters, 4/3/2008)

7. April 3, 2008: North Korea announces it is suspending all dialogue with South Korea and closing the border to Seoul officials, its toughest action in a week of growing cross-border tensions. (North Korea cuts contacts with South, The Austrailan, Park, Chan Kyong, 4/3/2008)

8. DPRK violates NLL three times (Yonhap) 5/22/2008

Reasons not to panic:

1.  Although eleven South Korean officials have been expelled from the Kaesong Zone, Some 48 South Koreans and five North Koreans still work at a separate inter-Korean management committee overseeing the industrial zone, where about 800 South Koreans work along with more than 25,600 North Korean laborers for 69 South Korean companies.  In other words, it is still business as usual for the most part. (Source: Pro-North Korea newspaper says relations with South at lowest since after nuclear test, Associated Press, 3/31/2008)

2.  DPRK statements about about attacking the South are a response to statements aired in public by General Kim Tae-young at a National Assembly hearing on his nomination as chairman of the joint chiefs of staff where he claimed his people had plans for use any time it was deemed necessary to take out the North’s nuclear facilities. (Source: North Korea sends a missile warning, Asia Times, Donald Kirk, 3/29/2008)

3. While all of this was going on, 159 CEO’s of small- to medium-sized South Korean enterprises toured North Korea in search of investment opportunities. (Source: 159 CEOs Begin Trip to North Korea, Korea Times, Kim Sue-young, 3/19/2008)

4. Tourism to the DPRK continues unhampered.

5.  The Pyongyang International Trade fair in May is on and business delegations are still welcome.

6. April 3, 2008: The South’s unification ministry said it did not believe civilian exchanges would be affected. Two Seoul-funded projects in the North – the Kumgang resort and the Kaesong industrial complex – are major hard currency earners for the impoverished nation. (North Korea cuts contacts with South, The Austrailan, Park, Chan Kyong, 4/3/2008)

7. Inter korean trade this year is up! (Yonhap)

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DPRK promotes multifaceted trade to boost exports

Thursday, March 27th, 2008

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-3-27-1
3/27/2008

The latest issue of the North Korean publication “Economic Research” (2008, issue no. 1) highlights the need to restructure North Korea’s trade system in order to meet the demands of the capitalist market. The journal quotes Kim Jong Il as saying, “[We] need fresh improvement, in our own manner, of the basic Socialist economy’s trade system of yesterday, meeting the current demands being faced due to the capitalist market.”

Therefore, the journal stresses, “As the socialist market crumbles, and given the demands of the capitalist market as [our] focus shifts to overseas economic relations, what is currently needed for the development of overseas trade is improvement of our own style to the trade system that can ensure large profits.

The journal goes on to recommend that, in order to meet these new demands of the international capitalist market, “the most important thing is improving the import-export system based on the foundation of an self-reliant national economy.” It states that raw materials should not be sold as-is, but rather should be turned into processed goods and then sold, that goods popular on the international market should be manufactured for export, and that niches should be chosen in which North Korean goods can dominate the international market.

However, the journal also says, “If individual offices trade with capitalists outside the scope of government controls, ‘reform’ and ‘opening’ sought by the imperialists would occur, and the nation’s economy could liberalize and capitalize…International trade must take place orderly under the uniform control and guidance of the nation.”

The journal asserts that even though a variety of offices are engaged in trade, they must first receive government permission, follow government guidelines, and operate in a government-created environment. The central government must standardize prices and designs of selected export goods from each trading company.

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Women and police clash in DPRK Markets

Saturday, March 22nd, 2008

Institute for Far Eastern Studies (IFES)
NK Brief No. 08-3-22-1
3/22/2008

Recently, North Korea passed a measure prohibiting women younger then 49 from selling goods in markets, leading to clashes between police enforcing the rule and younger women wanting to work in markets.

The March 19th newsletter from ‘Good Friends’, an organization providing aid for North Korea, reported that on February 5th in Haeju, South Hwanghae Province, women who were not allowed to enter the local market and so were selling goods on a nearby corner physically clashed and police. This reportedly led to the arrest and detention of 9 people.

The newsletter reported, “The women held at the police station were subjected to harsh interrogation as to ‘who was the ringleader’, and after being subjected to four days of torture, one who could no longer hold out confessed to being the ringleader and was sent to a detention center, while the remaining women were all released.”

North Korean authorities announced the measure restricting women under 49 from selling goods in markets after December 1st last year, and that measure is being enforced not only in Pyongyang, but in rural areas as well.

According to Good Friends, “Just like other cities, Haeju City has received absolutely no food rations since March,” and “Women from households barely managing regular meals through market trading are being reduced to the weakest level by North Korean authorities’ prohibition on trading.”

It follows that in Haeju City, either authorities recognize that if these women can not sell in the markets their families will starve to death and so turn a blind eye to their activities, or these women, prevented from selling in markets, will continue to clash with authorities.

The newsletter also reported, “On March 3, in Chungjin City, North Hamkyung Province, organized protests by women prevented from market activities by the new regulations broke out, and Chungjin City authorities are now allowing all women, with no exception, to sell goods in markets.”

Immediately following organized protests by these women, Chungjin City officials reported the disturbances, but no policies to deal with the issue were forthcoming, and so it appears that all women, with no exception, are now allowed to conduct market activities.

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World oil and grain prices up, DPRK feels the pinch

Thursday, March 13th, 2008

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.

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