Is there any additional way to evaluate the competing claims about diversion?
Although not precise, one way is to go back to the basics. In an economic exchange, every purchase is also a sale, and regardless of the channels through which they flow, the quantities bought and sold have to match up. As a plausi- bility check, we use a simple balance sheet calculation to stack these diversion estimates up against what we know about the North Korean food economy. By comparing data on production, aid, and imports against estimates of the food passing through the PDS, we can get some broad order-of-magnitude estimates of the share of total supply passing through the market. As we will show, these estimates are highly germane for understanding the extent of diversion. More- over, they can be triangulated using sources of information such as household surveys done by the WFP. We conclude that the numbers add up: the estimates of significant diversion are consistent with these other sources of information about the North Korean food economy.
As the external aid effort ramped up, the WFP targeted roughly 30 percent of the population through its feeding programs. The size of the targeted group had to be adjusted after 2003 as donations fell. But if we combine the WFP targets with the estimates of diversion cited above—taking 10 percent as the lower bound and the 50 percent cited in the Good Friends report as the upper bound—it suggests that enough food to feed 3 to 15 percent of the population has been diverted. What do we make of such an amount? First, it is not trivial.
It is not massive in terms of overall demand but clearly large enough to divert substantial amounts of food aid from intended beneficiaries and to provide substantial rents to those who manage to gain control over it.
At the same time, the diversion is large enough to have had an effect on the broader process of marketization. By acting as an additional source of supply outside government control, the diversion of aid probably contributed to the development and scope of markets as institutions for intermediating the allo- cation of supply. Diversion probably contributed to the downward trend in market prices at least as the worst of the famine started to ease, before the post- 2002 surge in inflation (table 5.1). If true, diversion helped those consumers who were obtaining food through the market, and disadvantaged producers.
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How far has the process of marketization gone, and how do aid and its pos- sible diversion fit into it? We have information on the allocation of grain to farmers, average PDS rations, and the share of the population dependent on the PDS (in effect, the nonfarm population). If we make some simple but we believe reasonable assumptions about the share of the population that is work- ing and the rations allocated to workers as opposed to dependents, it is possible to make some very rough estimates of the share of total food supply from all sources that was moving through the PDS. The remainder constitutes the share of total supply that was being channeled in one form or another to the market or non-PDS forms of exchange.
As we have seen, rural North Koreans on cooperative farms receive grain at the time of the harvest, which they can supplement with other own-grown sources. The urban story is more complex, as there are four channels through which urban households obtain food: PDS monthly rations, WFP support to institutions such as schools and hospitals, the WFP’s food-for-work (FFW) programs, and the market. For the purposes of these calculations, we assume that non-WFP aid, primarily from China and South Korea, goes directly into the PDS to support monthly rations (we include the military as part of urban North Korea and thus do not count Chinese aid as being diverted to the mili- tary). For the purposes of these calculations, we assume that the food-for-work program, which is small in relative terms, is effectively outside the PDS and not subject to diversion. Non-FFW distribution is assumed vulnerable to diversion to the market at rates ranging from 10 to 50 percent per the estimates we have culled from the humanitarian community.
We further assume that WFP aid either goes exclusively to the PDS monthly ration channel or, if it goes to institutions such as schools and hospitals, that aid is offset by corresponding reductions in the monthly rations of families receiv- ing support through the institutional channel, as has been confirmed by WFP staff. For example, if a family is entitled to a certain PDS ration but includes a child who is also fed at school, then the household sees a reduction in its PDS ration. The implication of this assumption is that, on net, WFP aid does not expand the coverage of the PDS system. These assumptions are detailed in algebraic terms in appendix 3.
Finally, we have to consider the impact of diversion. We assume that once food is diverted into the market, it is lost to the PDS, and the system delivers to consumers less than it was supposed to on paper—that is, the state does not subsequently extract more food out of the cultivators to compensate for pilfer- age.7 In this balance sheet calculation, diversion will increase marketization from the standpoint of consumers by forcing them into the market, but from
Diversion 123 the standpoint of producers it does not make any difference. Once the state has collected its share of cooperative output, its final disposition does not matter.
We also assume that food obtained from domestic production is not subject to diversion; only aid is.8
Food is fungible to a large degree, and it is therefore impossible to say which sources of food are going where: food might find its way to the market as a result of the behavior of farmers or because of the diversion of aid. Nonethe- less, we think of marketization in at least three ways: the share of total domes- tic production (minus the allocation to farmers; this is important) going to the market, the share of food consumption sourced through markets, and, an inverse indicator, the value of aid as a share of food passing through nonmarket channels. The results of these calculations for the period 1999–2003 are striking:
84 percent of output is either consumed on the farm or goes into the market.
This means that the state is unable to procure very much domestic production for the purpose of supplying the PDS. Under the assumption that between 10 percent and 50 percent of aid is diverted, consumers rely on the market for roughly half of their consumption (42 percent under the lower diversion assumption; 52 percent under the higher diversion assumption). This implica- tion is consistent with recent WFP survey results that are discussed in chapter 7 and is also consonant with refugee interviews and defector surveys that indi- cate that the market, not the PDS system, is the primary source of food for a significant share of the population.
Last, we can express the value of aid as a share of what passes through the PDS system. In essence, this is the flip side of the marketization estimate from the cultivator perspective. Since the state procures little local production for the PDS, these calculations suggest that the PDS system has largely become a mechanism for distributing aid. Aid accounts for 78 percent—nearly four- fifths—of what is reputedly distributed through the PDS system.
This exercise is subject to a number of possible risks. One has to do with our assumptions about the demographics. Farmers may also choose to consume some of their surplus rather than selling it on the market, managing to secure larger allocations than the ones formally given them. This may seem almost self-evidently true, but in fact it is not obvious. Farmers have access to other sources of food grown on either legal or illegal private plots, and this diversion of effort may have some effect on overall output. But we are doubtful that cooperative farms are able to divert large quantities of the main food grains.
At least until the 2005 harvest, allotments had increased quite clearly, in part to avoid this very problem. Moreover, the government had become harshly vigilant in trying to check the hoarding behavior of the high famine period
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even before the effort to increase grain procurement and revive the PDS in late 2005. A third possibility is that some portion of the population—a protected elite—is getting higher rations and consuming very much more than these numbers suggest. Again, this is possible, but, as we have seen, the protected elite—at least during the famine—was not large, and in any case there are lim- its to how much grain an individual can consume. Those privileged enough to have access to larger rations of food would also be in a position to supplement those rations on the market and through consumption of a more varied diet.
We are therefore skeptical of the idea that diversion to elite consumption would account for a large share of what we observe.
Instead, these results are consistent with the notion that diversion of aid away from state-controlled channels has contributed to the broader process of marketization. North Korea’s own statistics suggest—no doubt unwittingly—
that the PDS is increasingly a mechanism for distributing international aid in the context of an economy in which food is increasingly distributed through the market.
Conclusion
As we are learning from a growing literature on the political economy of aid, the donor-recipient relationship must be seen as a bargaining game. Donors seek to advance their objectives—both humanitarian and political—and recipients seek to maximize aid while limiting the conditions to which this aid is subjected. Aid to North Korea is dominated by food assistance through the WFP, as we have seen, but in other aspects it shares this basic structure. What is distinctive is that the nature of the North Korean political system—its overweening control and willingness to allow its citizens to experience extreme deprivation—actually gives it surprising leverage over the aid community. Because the international humanitarian community, humanitarian interests within the major donors, and the NGOs place such strong weight on the plight of the North Korean people, they have little bargaining power vis-à-vis the government. As a result, the out- side community has largely been forced to accept what we call North Korean exceptionalism: an aid regime that is subject to much more substantial con- straints than those typical of most aid settings. Until 2005, we saw incremental changes in this regime over time, and some signs of marginally greater access than in the past. But the events of late 2005 and early 2006 described at the end of chapter 4 show how reversible these developments are.
Diversion 125 The flip side of the weak monitoring regime in the country is the problem of diversion that we have taken up in this chapter. We analyzed a variety of sources of evidence on diversion and its potential welfare impact across differ- ent social groups. Our conclusion is that something on the order of 30 percent of aid was probably being diverted by 2005. The plausibility of this estimate is supported by a simple balance sheet exercise that suggests that diversion on this scale appears to be consistent with what we can observe about the extent of marketization of local grain production and the increasing primacy of the market as the institution through which households secure food.
The next two chapters extend and elaborate these two themes. In chapter 6, we look in more detail at the sometimes conflicting interests of the donors and the problem of coordination these differences pose. In chapter 7, we return to the issue of marketization and examine how economic reforms and ongoing institutional changes within North Korea affect the severity and incidence of food insecurity.