North Korea Opens

Marcus NolandPeterson InstituteSeptember 2008

Key messages Transformation better understood as an

unintended response to state failure than as a top-down reform.

Policy has been ambivalent—at times ratifying (2002) and at others reversing this process (2005),

Again on the precipice of a humanitarian disaster.

Outcomes conditional on external relations Nuclear, aid deals linked, like it or not Greater external security could encourage reform Six Party Talks, NEAPSM, and the economic

component

Decline and recovery Economy bottomed

out late 1990s Grassroots

marketization Growing external

trade, increased integration with China and South Korea.

Chronic deficits.

Ratio of balance of payments transactions to licit merchandise exports

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

ratio

South Korea

China

Observed North Korean Commercial Merchandise Trade

0

500

1000

1500

2000

2500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ion

US

D

Exports

Imports

Chronic balance of payments deficits increasingly financed by aid

South Korean assistance has exceeded China’s since 1999; Lee government may represent real break

Role of illicit exports probably exaggerated in public discussion

Official transfers (current and capital) as a share of commercial goods imports

0

10

20

30

40

50

60

70

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

percent

range

best guess

note: $350 million summit payment from 2001 is considered as three separate transfers of $117 million over 2000-2002 in this figure

China and South Korea aid and exports to North Korea

0

100

200

300

400

500

600

700

800

900

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

million US$

PRC Aid - Range

ROK Total Exports

ROK Non-Commercial Exportsand Economic CooperationROK Non-Commercial Exports

PRC Aid - Best Guess

Re-emergence of pre-famine conditions

Origins Evidence

Quantity Price Direct observation

Conclusions Hunger-related

deaths are occurring Dynamic in motion to

carry crisis into 2009 Should not grow into

1990s-style famine

Origins On the back of increasing

harvests, rising aid government undertook reckless actions in 2005

Internally Banning private trade in

grain Seizures in rural areas Shut down of relief

agencies in the hinterland

Externally: 2006 missile, nuclear tests

Bad weather

Evidence I: Quantities

North Korean Grain Balance

-2000

-1500

-1000

-500

0

500

1000

1995/96 1998/99 2001/02 2004/05 2007/08

metric tons '000s

Haggard-Noland-Weeks Estimate

UN System Estimate

North Korea Food Balances 1995/96-2007/08

0

1000

2000

3000

4000

5000

1995/96 1999/00 2003/04 2007/08

metric tons '000s

Aid

Imports

Domestic production

Adjusted Total Demand

Evidence II: Prices

1. 10/01/2005: Ban on private trade in grain & revival of PDS 2. 07/14/2006- 07/15/2006: Flood 3. 10/09/2006: Nuclear Test & UN Sanctions 4. 08/15/2007- 08/31/2007: Flood 5. 12/01/2007: Introduction of Chinese Export controls, partial ban on trading activities 6. 04/01/2008: Tightened control on trading activities 7. 05/14/2008: Military stocks reportedly ordered released & US aid announcement on the 16th. 8. 06/30/2008: Arrival of first aid shipment

100

200

300

400

500

Pric

e In

dex

Oct

-14-

2004

Oct

-14-

2004

2005

Oct

-14-

2004

2005

2006

Oct

-14-

2004

2005

2006

2007

Oct

-14-

2004

2005

2006

2007

2008

Oct

-14-

2004

2005

2006

2007

2008(1

)

Oct

-14-

2004

2005

2006

2007

2008(1

)

(2)

Oct

-14-

2004

2005

2006

2007

2008(1

)

(2)

(3)

Oct

-14-

2004

2005

2006

2007

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)

(2)

(3)

(4)

Oct

-14-

2004

2005

2006

2007

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)

(2)

(3)

(4)

(5)

Oct

-14-

2004

2005

2006

2007

2008(1

)

(2)

(3)

(4)

(5)

(6)

Oct

-14-

2004

2005

2006

2007

2008(1

)

(2)

(3)

(4)

(5)

(6)

(7)

Oct

-14-

2004

2005

2006

2007

2008(1

)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

FAO-Rice 50% Corn 50% NK-Rice 50% Corn 50%

North Korean Grain Prices

0.1

.2.3

.4.5

.6.7

.8C

orn

-Ric

e P

rice

Ra

tioO

ct-1

4-20

04

Oct

-14-

2004

2005

Oct

-14-

2004

2005

2006

Oct

-14-

2004

2005

2006

2007

Oct

-14-

2004

2005

2006

2007

2008

Oct

-14-

2004

2005

2006

2007

2008(1

)

Oct

-14-

2004

2005

2006

2007

2008(1

)

(2)

Oct

-14-

2004

2005

2006

2007

2008(1

)

(2)

(3)

Oct

-14-

2004

2005

2006

2007

2008(1

)

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(3)

(4)

Oct

-14-

2004

2005

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2007

2008(1

)

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(5)

Oct

-14-

2004

2005

2006

2007

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-14-

2004

2005

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)

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Oct

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2005

2006

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2008(1

)

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(6)

(7)

(8)

North Korean Corn-Rice Price Ratio

Evidence III: Qualitative Reported crack

down on markets, internally, externally

Direct observation documents reemergence of famine-era pathologies Demand side Supply side

Options Long-run solution is industrial revitalization

Government sensitive to political implications of reform

Improved external security could encourage reform; no guarantee, though

Six Party Talks, NEAPSM: not all forms of engagement equally desirable

Short-run need food and fertilizer and other inputs Aid is welcome but Without fertilizer, coming harvest likely to be low

implying continued crisis into 2009

Thank you for your attentionFor further information: Haggard and Noland,

Famine in North Korea, on sale at Columbia University Press

Additional tables and figures taken from Haggard and Noland working papers and policy briefs at www.petersoninstitute.org

Figure 1. North Korea Food Balances, 1995/96 to 2007/08

0

1000

2000

3000

4000

5000

6000

1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Thousands of Metric Tons

UN Uncovered Import Requirement Estimate

Aid

Imports

Domestic production

Adjusted Total Demand

Total Demand

Adjusted Human Demand

Human Demand

010

0020

0030

0040

00P

rice

07/01/04 07/01/05 07/01/06 07/01/07 07/01/08

Price of Corn Price of Rice

Corn & Rice Price Observations

Table 1. ANOVA of Corn and Rice Price on Time Periods and Regions

First Period January-April 2008Second Period May-August 2008Cities included Hamheung, Pyongyang, Sineuiju, Wonsan

CORNNumber of obs 33Root MSE 314.939R-squared 0.2649Adj. R-squared 0.0953

Source Partial SS df MS F Prob > FModel 929445.779 6 154907.63 1.56 0.1981Second Period 715170.97 1 715170.97 7.21 0.0125Region 218847.40 3 72949.1342 0.74 0.5403Interaction term of Second period & Region 181409.05 2 90704.5257 0.91 0.4132Residual 2578851.19 26 99186.5842Total 3508296.97 32 109634.28

RICENumber of obs 62Root MSE 472.388R-squared 0.4185Adj. R-squared 0.3431

Source Partial SS df MS F Prob > FModel 8670814.59 7 1238687.8 5.55 0.0001Second Period 6262779.83 1 6262779.83 28.07 0Region 1028109.61 3 342703.203 1.54 0.2157Interaction term of Second period & Region 300377.749 3 100125.916 0.45 0.7192Residual 12050112.8 54 223150.237Total 20720927.4 61 339687.335