Challenges in Expanding Regional Cooperation in Northeast Asia Marcus Noland Peterson Institute and East-West Center November 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. Million USD 2500 2000 1500 1000 500 0 ratio 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 Observed North Korean Commercial Merchandise Trade Exports Imports 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Ratio of balance of payments transactions to licit merchandise exports South Korea China 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Chronic balance of payments deficits increasingly financed by aid percent 70 60 50 40 30 20 10 0 Official transfers (current and capital) as a share of commercial goods imports range best guess 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 note: $350 million summit payment from 2001 is considered as three separate transfers of $117 million over 2000-2002 in this figure 600 500 400 300 200 100 China and South Korea aid and exports to North Korea million US$ 900 PRC Aid - Range 800 ROK Total Exports 700 ROK Non-Commercial Exports and Economic Cooperation ROK Non-Commercial Exports PRC Aid - Best Guess South Korean assistance has exceeded China s since 1999; Lee government may represent real break Role of illicit exports probably exaggerated in public discussion 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Survey of Chinese firms doing business in North Korea Mix of activities, sectors Differing types: Some large SOEs, most small private Most began with DPRK 2002 or later Most from bordering provinces Some withdrew Control group
Some snapshot results Financing tight, most settlement in dollar or yuan Most counterparts are SOEs Unhappiness with dispute settlement Business environment: Cell phone ban 87 Changing rules 79 Infrastructure 79 Regulations 70 DPRK reputation deters involvement Expropriation risk deters investment
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 Korea Food Balances 1995/96-2007/08 metric tons '000s 5000 metric tons '000s 1000 North Korean Grain Balance 500 4000 0 3000-500 2000 Aid Imports -1000 1000 Domestic production Adjusted Total Demand -1500 Haggard-Noland-Weeks Estimate UN System Estimate 0 1995/96 1999/00 2003/04 2007/08-2000 1995/96 1998/99 2001/02 2004/05 2007/08
(6) (7) (8) Evidence II: Prices North Korean Grain Prices North Korean Corn-Rice Price Ratio 100 200 300 400 500 Price Index 0.1.2.3.4.5.6.7.8 Corn-Rice Price Ratio Oct-14-2004 2005 (1) 2006 (2) (3) 2007 (4) (5) 2008 (6) (7) (8) Oct-14-2004 2005 (1) 2006 (2) (3) 2007 (4) (5) 2008 FAO-Rice 50% Corn 50% NK-Rice 50% Corn 50% 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 16 th. 8. 06/30/2008: Arrival of first aid shipment
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 Big unknown is size of current harvest
Thank you for your attention For further information: Haggard and Noland, Famine in North Korea in English and Korean Additional tables and figures taken from working papers and policy briefs at www.petersoninstitute. org