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North's economy 'drying up'
By Geoff Hiscock
HONG KONG, China (CNN) -- North Korea's already low standard of living is deteriorating rapidly as economic activity dries up, according to a new report by banking group HSBC. It says the rhetoric of Pyongyang's nuclear confrontation with the United States has masked the real issue, which it says is the North's economic implosion. "With international donations of food and energy drying up and limited scope for market-based reforms to work, this is a system battling against the clock," it said. It warns the risk is rising that if the North collapses, South Korea will face the turmoil of an unplanned reunification, with all the attendant social and economic costs. Estimates of the cost of reunification range up to $250 billion in the first 10 years, extending out to $840 billion over a 40 to 50-year period. The bank, which based its report on a visit to the North by one of its Hong Kong-based economists, says it believes the North is gambling on negotiating a non-aggression treaty with the United States that would allow Pyongyang to downsize its army and shift resources to the civilian economy. Only one option
"North Korea only has one domestic option to fix its economy -- mass demilitarisation," HSBC said. North Korea has more than a million men and women under arms -- one of the largest standing armies in the world. But the isolated country, controlled by "Dear Leader" Kim Jong Il since his father Kim Il Sung died in 1994, is paying a heavy price for focus on military strength. Almost a third of its 23 million people are dependent on outside food aid, and up to 2 million may have starved during the famine of the mid-1990s. Even as Kim Jong Il ratchets up nuclear tension on the Korean peninsula in the hope of wringing concessions from the U.S., the crisis over food and energy supplies is worsening, according to the HSBC report. Oil deliveries suspendedThe suspension of oil deliveries in November had taken out more than 6 percent of North Korea's electricity generation capacity. Under a 1995 agreement, the Korean Peninsula Energy Development Corp (KEDO) agreed to supply the north with 500,000 tonnes of heavy fuel oil a year in exchange for the freezing of Pyongyang's nuclear program. But deliveries came to an end after North Korea said in October it had continued its nuclear weapons program in secret since 1994. The bank's report says electricity for heating has dropped by 31 percent in recent months. The World Food Program, which aims to feed 28 percent of the North Korean population -- 6.4 million people -- in 2003, says that from pledged commitments so far, it expects to meet only 14 percent of that. International donors, including Japan and the U.S., have withdrawn because of tensions over the nuclear issue, and abductees. Brief 'sunshine' periodThe deteriorating situation on the Korean peninsula follows a brief "sunshine" period in 2000-01 and a push by South Korean groups such as Hyundai to increase commercial links with the north. In June 2000, Kim Jong Il and South Korean president Kim Dae-jung held a historic three-day summit in Pyongyang, where they committed to eventual reunification and allowed reunions of families separated during the 1950-53 Korean War. But the North's relationship with South Korea and its allies failed to develop, and by January 2002, U.S. President George W. Bush had named North Korea part of an "axis of evil" with Iraq and Iran. Pyongyang's admission in October that it had continued its nuclear program, followed by its December reactivation of its Yongbyong nuclear facility and the ouster of International Atomic Energy Agency inspectors, exacerbated tensions. Last month, North Korea withdrew from the Nuclear Nonproliferation Treaty. On Sunday, Britain's Sunday Telegraph reported that North Korea planned to build four nuclear power plants, each bigger than the Yongbyon plant. It quoted a North Korean energy official as saying desperate measures were needed to tackle the country's power shortages. Three scenariosHSBC's report outlines three "endgame" scenarios for North Korea: . a security agreement with the United States that leads to a downsizing of the armed forces and a move towards economic reform; . assistance from South Korea under new president Roh Moo Hyun, due to be sworn in on February 25; . regime change, following a resource squeeze that eventually impacts on the North Korean armed forces. HSBC said a deal to end the crisis looked less likely, and that the balance of probability was tilted towards the third scenario. "We think that while the situation changes from day to day, the U.S. and the D.P.R.K (North Korea) are as far apart as any two parties in any negotiation could be," it said in its report. The bank said the unprecedented squeeze on resources, with no sign of a way out, meant the risk of unplanned and earlier-than-expected reunification had risen. "This time it really is different," it said.
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