Food Update: Doubts on China, the WFP, and Ireson on Prices

February 14, 2012 7:00 AM

We try to maintain an appropriate degree of incredulity about news on North Korea. But although surprised, we were not adequately skeptical in our post on two stories (from Tokyo Shinbun and the AFP) on a massive Chinese food aid program. Talking with friends in governments and NGOs on both sides of the Pacific, skepticism seems to be the order of the day.

Reported at 500,000 MT of food, the Chinese commitment would have been a complete game-changer. A sense of scale can be gotten by updating briefly on the current WFP program. The WFP approved a two-year program (technically a “protracted relief and recovery operation” or PRRO) in June 2010. The program was designed to run 24 months from July 2010 to June 2012 but funding for it was slow getting out of the blocks. In response to mounting evidence of shortages and a formal appeal from the government, WFP launched a separate emergency operation (EMOP) to run from April 2011 through March 2012, incorporating activities and beneficiaries of the PRRO.

To avoid overlap between the two operations, the budget was revised to suspend the first program for the duration of the second, but also to cut its overall size. Commodity requirements were cut by about 75,000 MT (roughly $30 million) and overhead costs by about $19 million leaving a total program of $50 million (81,000MT of food). The WFP issued a resourcing update on February 6, and the program is less than half funded and even that funding includes a carryover accounting for 7 percent of the program.

To make a long story short, the Chinese contribution would have equaled more than six WFP programs. Another way of scaling this: although grain could of course be ocean-shipped, trucks carry about 10 tons each; rail cars 60. Do the math; 50,000 truck-loads, 8,300 rail cars.

But the sources of doubt are not only centered on the purported program’s size. The AFP story was read as confirmation of the aid program because lines of trucks laden with food were lined up on the Chinese side of the border. But Kwon Tae-jin of the Korea Rural Economic Institute, drawing on the generally-reliable KITA data, has noted that North Korea imported 376,000 MT of grain from China last year, up 20 percent from 2010. (Corn accounted for 36 percent of the imports, followed by flour at 33 percent, and rice at 24 percent). The food-laden truck story could be explained by the closure of the border following Kim Jong Il’s death and the resumption of commercial imports thereafter, with a predictable backlog.

In sum, it is plausible from the political signals Beijing sent following Kim Jong Il’s death, documented by Adam Cathcart in his exhaustive dossier, that China might have provided some support. But with respect to the size of the program—or even if it exists--we really don’t know anything.

Finally, Randall Ireson has written an elegantly simple take on North Korean agriculture for 38 North. He is somewhat more bullish on what agriculture can do for the transition than we were in Famine in North Korea. Although accounting for only about 35% of the economically-active workforce, Ireson argues that “agriculture could lead a revival of the DPRK economy if appropriate policy changes were implemented.”

But we are in complete agreement with the core of his argument. There are no technical barriers to improved agriculture productivity, but technical fixes are not the answer; the constraints are in policy, incentives and ultimately in politics. Ireson:

“Grain production quotas inhibit wider planting of soybean and other legumes. The requirement that farms sell all surplus grain to the state at a price less than 5% of its free-market value insures that no more than minimum effort is directed to maize and rice farming. Farm workers give more attention to the production of vegetables, small animals, and fruit which can be sold for a profit in the farmers’ markets, but which do not substantially boost the national food balance. Farm machinery maintenance is impeded by the lack of spare parts (especially for modern, fuel efficient tractors which have been imported by various aid programs). Most importantly, a farm that somehow raises its production cannot legally exchange its grain surplus for anything meaningful that would further stabilize or improve its productivity because of the price controls on grain and the restrictions on imports of fuel, fertilizer, and other resources that a farm needs.”

Nor is this observation based solely on economic theory; Ireson cites some micro-level examples that prove the point as well. NGO projects that involved localized price reforms—for example, with respect to seeds—have had immediate and dramatic effects.

Ireson summarizes:

“Without changing the economic rules that affect domestic prices, internal terms of trade, import of critical supplies, and investment in farm productive potential, DPRK farms will never become sustainably productive.” Yep.

Comments

David Hawk

What struck me most about Randy Ireson's piece in 38 North, was the idea that surplus grain must be sold to authorities at 5% of market price! By "surplus" do you think he means beyond what is used for consumption by the farmer or coop? Can it really be a nickle on the potential dollar? Isn't that almost confiscatory rate? What farmer would plant and harvest rice or grains at that level of remuneration? Doesn't that put the need for food aid in a different light? Speaking of which, if 500,000 tons from China would be a "game changer", as you wrote, does that make the amount of proffered US nutrients half a game changer?

shaggard

David: Your consternation and disbelief is exactly appropriate. Farmers are paid out following the harvest by lump-sum rations which they then have to manage over the course of the year; they are not part of the PDS. We would need to check whether the surpluses mentioned here are those generated by the coop as a whole or by individual farmers, but given the collective responsibility system you can see why the argument about incentives is so correct. First, there are no incentives to generate any surpluses at all because the will be effectively confiscated; that is Ireson's point. Note also that while this may seem like a ridiculous discount, it is to the market price; market prices have drifted steadily higher meaning that the official prices are continually declining as a share of the market price, making incentives even more perverse over time. The answer is simple: move the official prices closer to the shadow or market prices. If our estimates of shortfall are correct, the US program alone would have made a significant effect on total supply. But what got us thinking about the Chinese contribution was precisely its size; why would the Chinese provide so much grain?

Randall Ireson

The concept of "surplus" grain in the DPRK deserves some clarification. Cooperative farms are assigned a production quota each year for rice, maize, etc. Within that quota is (1) the grain retained for the farm population (an allowance somewhat higher than the PDS standard), (2) grain delivered to the state in payment for fertilizer, fuel & other supplies delivered through the official supply channels, (both grain exchanged and supplies received are priced at official rates, and (3) a grain quota required to be delivered to the PDS, which is paid for at official rates. Some of the cash received is kept for farm management and collective social support, some is distributed to workers according to their workpoints. For a short time in the mid 2000's, any grain production above this total could be disposed of by the farm (or even disaggregated to the sub-workteam) as it chose, including sale on the open market. Now, however, all grain, even that above the farm's or work team's quota, is required to be sold to the state, and is paid for at official prices which are about 5 percent of the open market price. There is plenty of evidence that some grain is diverted and traded outside of official channels, but the amount is unknown. But even if farms or workteams could sell substantial quantities of grain at fair prices, there is no mechanism for them to purchase (import) additional fertilizer, fuel or equipment beyond the insufficient supplies that the state has already allocated. Thus investment in additional productive capacity (or even maintenance of existing capital) is virtually impossible.

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Stephan Haggard Senior Research Staff

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