Inflation Adds Another Woe for N. Korea

SEOUL -- Prices in North Korea for everything from rice to shoes have soared in recent months as a result of economic reforms gone haywire and a souring of relations with international aid donors, economists and defectors say.

North Korea is extremely secretive about statistics, but economists estimate that inflation is galloping along at an annual rate of at least 600%. At the same time, many factories are running out of money to meet their payrolls.

The precarious economic situation puts millions of North Koreans at risk of starvation in the coming months and undermines the Communist regime. It could also partially explain North Korea’s recklessness in the current standoff over nuclear weapons.

“They are in desperate shape, and that is one reason they behave so wildly,” said Cho Myong Chol, a former economics professor at Kim Il Sung University in the North’s capital, Pyongyang, who defected to South Korea in 1994.

Economists say hastily conceived price and wage reforms, instituted July 1 in an effort to introduce the rudiments of a market economy, triggered the inflation.

The hope was that the liberalization of prices would spur production in decrepit factories and boost stocks of badly needed commodities. Instead, tensions erupted in October over North Korea’s nuclear program, and that was followed by the suspension of outside energy assistance and cuts in food donations.

“The government started the reforms in quiet times, and now they are in a state of crisis,” said Cho, who maintains contacts with North Korea. He said the regime is trying to roll back some of the reforms and reassert control over prices. However, he added, “The prices keep going up steadily, and they can’t get them under control.”

In theory, prices were to increase to realistic levels -- more in line with the black market -- and wages were to be raised accordingly so that workers could afford the prices. But costs quickly lurched out of control.

“The prices went up more than wage hikes. But then, in a lot of places you can’t even get wages. It is a double curse,” said a 29-year-old North Korean defector who has been working in China near the North Korean border to help others who have escaped. Like many other defectors, he uses an assumed name, Lee Kwan Shik.

Upper-tier workers are supposed to receive wages of 2,500 won a month under the new system. But rice, which is the staple of the North Korean diet, costs about 140 won a pound, meaning that a well-paid worker would at best be able to provide a family with slightly more than half a pound of rice a day.

Lee said that more and more would-be defectors are trying to escape from North Korea in anticipation of another famine like the one in the mid-1990s, believed to have killed 2 million people, or 10% of the population.

“Everybody is suffering. I’ve been surprised to meet more and more soldiers who are escaping [into China] because it is too difficult to overcome the hunger,” Lee said.

“We had been so full of expectations that once these measures were enacted, there wouldn’t be any more shortages,” said a North Korean homemaker, 38, who defected in August and asked that her name not be printed. “But we got just higher prices, nothing more.”

The World Food Program, the largest U.N. agency operating in North Korea, is warning of a coming calamity. Although the agency is not permitted to visit farmers markets where food is sold or bartered, officials say they have heard complaints about soaring prices.

“The assessment is that there are significant price increases,” said Richard Corsino, head of the agency’s North Korea program, in a telephone interview from Pyongyang. “I think it is purely a question of supply and demand. There is simply not enough food.”

The agency, which used to provide food assistance to 6.4 million North Koreans, recently cut its distribution list in half because of a lack of donations. According to Bourke, it has only 10,000 tons of food in the country, little more than one week’s supply, and does not expect any new donations until late this month.

The United States delivered its last shipment of grain to North Korea in December, but the Bush administration insists that is not a pressure tactic in the nuclear struggle.

Among North Korea watchers, there is debate about the extent to which the nuclear tensions are compounding the food crisis. The North Korean media are replete with predictions that the country will be the next target of U.S. military action after Iraq, which could be prompting some people to hoard food.

“There is a strong sense that there is some stockpiling, that they are hunkering down,” said an aid official who spoke on condition of anonymity.

Others say inflation was the inevitable consequence of embarking on radical reforms when foreign currency, fuel and food supplies were in short supply.

“These reforms unleashed forces that the North Koreans are not equipped to control,” said Bradley Babson, a senior advisor to the World Bank who has worked with North Korea. “They need institutions to manage their economy, a banking system, a macroeconomic policy, all those things we take for granted. They were taking a shot in the dark.”