Summary:

That gap was financed by revenues and funds from both licit and illicit sources. The former would include international foreign aid, remittances from Koreans living in Japan, South Korean tourism revenues, and South Korean economic cooperation payments. The latter would include proceeds from sales of weapons and illegal drugs and counterfeiting activities.

Although I cannot provide precise estimates of these illicit revenues, there can be no doubt that DPRK involvement in these illicit activities, far from being an aberration, is instead part and parcel of its basic approach to diplomacy and economic policy.

Unedited Transcript from the Event:

Witnesses:

Panel I: Andre Hollis, Deputy Assistant Secretary for Counternarcotics, Department of Defense; William Bach, Director, Office of Asia, Africa, and Europe, Bureau of International Narcotics and Law Enforcement Affairs, Department of State

Panel II: Dr. Nicholas Eberstadt, American Enterprise Institute; Dr. Robert L. Gallucci, Georgetown University Walsh School of Foreign Service; Dr. Larry M. Wortzel, Heritage Foundation

Panel III: Former North Korean High Ranking Government Official, Identity Protected; Bok Koo Lee (alias), Former North Korean Missile Scientist

Excerpts: Testimony of Nicholas Eberstadt, AEI

MR. EBERSTADT: Mr. Chairman, distinguished members of the committee and esteemed colleagues and guests, it's always a pleasure and an honor to appear before you. With your permission, I'll submit my written record later.

I thought I would begin with a little bit of background research since I have no security clearances and thus only know what I read in the newspapers about DPRK merchandise in counterfeiting, weapons and drugs.

If we can move to the first slide, please. What we have here is some of my homework. I have tried to reconstruct North Korean trade patterns according to what we call mirror statistics, which is to say, North Korea's trade partners' reports about purchases and sales of merchandise by the DPRK. These are highly incomplete and quite limited. But they provide some insight, I think, that may be useful. This first figure shows total reported North Korean export revenues over the period from '89 to 2001. Of course, they went down after the end of the Soviet Union.

The point to take home here, I think, is that North Korea as a state has essentially no legitimate legal visible means of support. In the year 2001, the DPRK reportedly through these data earned $750 million in total revenue through non-military merchandise sales. To put that in perspective, that would be less than $40 per capita for the country as a whole—an absolutely extraordinarily low level for an urbanized literate population.

SEN. FITZGERALD: What were they exporting back in the late ‘90s that had them
at a much higher figure?

MR. EBERSTADT: They had export arrangements whereby the Soviet Union was
obliged to purchase their supplies, textiles, magnesite, cement, steel, other
products of that sort. But they were, so to speak, forced [to do so.]

SEN. FITZGERALD: But their buyer evaporated with the demise of [the Soviet Union?]

MR. EBERSTADT: Their buyer evaporated and there were no new markets for these
products.

SEN. FITZGERALD: Now, the $650 million or $700 million in legitimate exports
that they now have, is that mainly textiles?

MR. EBERSTADT: It would be textiles, gold, steel, cement, some agricultural
products, including sea products, fish, seaweed, mushrooms, the like.

SEN. FITZGERALD: Okay. Okay. Thank you.

MR. EBERSTADT: The next slide will show North Korea's reported merchandise imports, what it's reported as buying from other parts of the world. That's gone up since 1998 rather significantly to a little bit over $2 billion reported and if we see the next slide, that will show the discrepancy between what North Korea is reported as earning legitimately and what North Korea is reported as buying. It's a big gap. The gap was down to about $600 million in the late '90s but has risen very substantially in the early 2000s, above $1200 million above $100 million a month.

If we look at the next slide, please, this shows North Korea's unexplained balance of trade deficit, if you will, how much more it is reported buying than earning through legitimate means. Excuse me, can we go back one? Yes. This is the overall merchandise trade deficit and that shows this increase to about $1200 million a year.

Part of that is due to China's subsidy of North Korea and in the following slide, number 4, figure 4, we take China out of the equation and we see the unexplained excess of purchases over imports going from under $100 million in '97 up to about $800 million in 2001. This, if you will, invisible means of support for the state includes foreign aid from other governments, including our own, Japanese remittances from DPRK groups in Japan, South Korean tourism payments, secret South Korean official payments including the payments made to secure the Pyongyang Summit of 2000 but also drugs, counterfeit and arms. We can't parse these out from these particular numbers but we can see that it has increased very substantially over the last number of years.

May I make a few additional points, Senator?

SEN. FITZGERALD: Yes.

MR. EBERSTADT: I'd make five additional points, if I could, very quickly.

First, I think it is reasonable from what we read in the newspapers to conclude that drug and counterfeiting traffic from the DPRK is a state business not a rogue unit's business or private enterprise. There is essentially no private enterprise in the DPRK. Ask yourself if it would be possible for individual farmers to cultivate thousands of hectares of opium poppies or to establish labs for methamphetamine production and the question, I think, answers itself.

Secondly, drug and counterfeiting is part and parcel of North Korean diplomacy not an aberration and we can see this by looking back as far as the 1970s. In 1976, the Scandinavians expelled North Korean diplomats for trafficking drugs, for being caught trafficking drugs. Why did it take them until 1976 to catch them? Because they didn't establish relations until '73. Similarly, why did it take Venezuela until '77 to catch North Korean diplomats trafficking drugs? Because they didn't establish relations until '74. You can go on down the list.

Third, drug and counterfeiting trade is entirely consistent with the official DPRK view of its legal and treaty obligations, which is to say, entirely opportunistic. It is a predatory approach and we see this in drugs and counterfeiting of other countries' currencies.

Fourth, the DPRK, as a government, positively prefers, I think, drug and counterfeiting business to other peaceful, legal means of merchandise trade. Again and again, the DPRK has indicated that it views ordinary peaceable commercial merchandizing as subversive of the authority of its state. Drug and counterfeiting is not subversive of its authority, which is to say drug and counterfeiting are part of the strategy for state survival of the DPRK.

Fifth and finally, if we can believe news stories, the DPRK's drug and counterfeiting businesses are centralized through something called Bureau Number 39 of the Workers' Party of the DPRK. This is controlled by the highest authorities of the state. This would suggest that revenues entered into through Unit Number 39 are also applied to the state's top priorities. It is no secret that the DPRK enshrines military first politics as its very first priority of state. Thus it is not at all a reach to suggest that narcotics and counterfeiting may directly be contributing to the WMD build-up that is
threatening the United States and her allies today.

Thank you, sir.

SEN. FITZGERALD: Thank you very much, Dr. Eberstadt.

SEN. FITZGERALD: Dr. Eberstadt, you had some very interesting statistics and you came up with good possible explanations for what could be funding the trade deficit that we know that North Korea has. One other possibility is that they could be getting foreign aid or could be borrowing money that would enable them to fund that large deficit. Are they getting foreign grants and loans of a sizable amount that you're aware?

MR. EBERSTADT: During the period up to 2001, sir, yes, they were getting foreign aid, including foreign aid from the United States government.

SEN. FITZGERALD: And how much was that that the U.S. was providing?

MR. EBERSTADT: The Congressional Research Service has estimated between 1995 and 2001, total humanitarian and heavy fuel oil and medical aid from the USG to DPRK was a little over $1 billion in total. So foreign aid certainly could help to explain [the trade deficit].

SEN. FITZGERALD: Are they getting loans from any international funds, like the World Bank or International Monetary Fund?

MR. EBERSTADT: No, sir. Our restrictions and sanctions on the DPRK held the United States to vote against membership or such loans and they are not receiving them. [The] DPRK does get a small amount of money from the U.N. Development Program but I think that's a few million dollars a year.

SEN. FITZGERALD: Dr. Eberstadt.

MR. EBERSTADT: Sir, I hope it's not churlish of me to point out that if the U.S. government were to determine conclusively that the DPRK were cultivating more than 1,000 hectares of opium poppies, illicit opium poppies a year, the U.S. government would consequently be obliged, under the Foreign Assistance Act of 1961, to impose additional economic sanctions against the DPRK, which is to say, if one were interested in promoting an engagement policy with the DPRK, it would be highly inconvenient to determine the DPRK has 1,000 hectares or more –

SEN. FITZGERALD: Are you suggesting that the State Department could be putting pressure on its officials who make those assessments to keep their finding under 1,000 hectares?

MR. EBERSTADT: Good lawyers don't ask questions they don't like the answers to.

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at AEI.