This is a rush transcript from "The Journal Editorial Report," January 20, 2007.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," another black eye for the scandal-plagued U.N. New documents suggest that tens of millions of dollars in U.N. cash have been funneled to Kim Jung Il's communist regime. We'll have the exclusive details.

Plus, Condoleezza Rice's plan to jumpstart the Middle East peace process. Can it work?

And media darling Barack Obama tests the presidential waters. But is he any match for Team Clinton?

Those topics, plus our weekly "Hits and Misses." But first, these headlines.

(NEWSBREAK)

GIGOT: Welcome to the "Journal Editorial Report." I'm Paul Gigot.

Following close on the heels of the oil-for-food scandal comes evidence now of another dictator using a U.N. program to prop up his regime.

Late this week, our Melanie Kirkpatrick broke the story, citing previously undisclosed documents that suggest that tens of millions of dollars in cash have been funneled to Kim Jung Il's North Korean government through the United Nation's Development Program, or UNDP, with little or no oversight.

In a January 16 letter to a UNDP administrator, Ambassador Mark Wallace, of the U.S. mission to the U.N., lays out what America digging has found so far.

According to Wallace, the UNDP's program in North Korea has, quote, "for years operated in blatant violation of U.N. rules, served as a steady and large source of hard currency and other resources for the North Korean government with minimal or no assurance that UNDP funds and resources are utilized for legitimate development activities," end quote.

Here to discuss these developments, "Wall Street Journal" Columnist and Deputy Editor Dan Henninger, as well as Rob Pollock and Jason Riley, both "Wall Street Journal" editorial board members.

Dan, our colleague, Melanie broke this story, couldn't be here today. Sounds to me like this is a kind of another oil-and-food — at least it has echoes of that, albeit, on a smaller scale. What are the North Koreans up to here?

DAN HENNINGER, WSJ COLUMNIST AND DEPUTY EDITOR: Well, what has happened here is that, going back, as far as we know, to about 1998, the United Nations Development Fund, which is the U.N. agency that engages in humanitarian assistance to countries, environmental assistance, developmental funds and such, has had a program up and running with North Korea.

Now, as far as we know, there are upwards of 30 projects — 30 project sites. For starters, they have only been visiting them once a year. But by and large, North Koreans don't allow foreigners to most parts of the country. So the United Nations has not been visiting these so-called sites at all.

GIGOT: Yes. U.N. rules say you should visit them once a year. But they aren't — but the North Koreans don't allow the U.N. officials to visit some of them.

HENNINGER: Yes. So that's for starters. Secondly, we know that tens of millions, perhaps $100 million have been spent on this program. The North Koreans insist that they get paid in hard currency. We are talking about literally cash payments.

Secondly, the office that the UNDP has in Pyongyang is, by and large, staffed with people picked by the North Korean government. The financial accounting is done by North Koreans. The North Koreans charge the United Nations $2 million a year in rent for the office in Pyongyang.

(LAUGHTER)

GIGOT: And elsewhere, in general, yes.

HENNINGER: And elsewhere. That's right.

GIGOT: Now, this is a regime that is starved for currency because it's isolated. It doesn't have a decent economy. It has a communist economy. This hard currency is really lifeblood stuff to sustain the regime, is it not?

ROB POLLOCK, WSJ EDITORIAL BOARD MEMBER: Yes, of course it is. And the amazing thing is that the U.N. just seems to have gone full steam ahead with this program, while Kim Jung Il was defying them in every way, by testing missiles, and eventually going ahead and testing a nuclear bomb. And nobody at the U.N. seems to have said wait a minute, what are we doing for this guy.

(LAUGHTER)

JASON RILEY, WSJ EDITORIAL BOARD MEMBER: It's really incredible. And it really speaks to the credibility of this organization. I mean...

GIGOT: Or the lack of credibility.

RILEY: Well, the U.N. enjoys — it's this sort of hallowed status in the international community. And clearly, it is unwarranted after oil-for- food, after this.

It is amazing that some people, even in this country, still want to subject U.S. military decisions to U.N. approval.

GIGOT: Well, they would say — in their defense, they would say, look, these are development programs. These are humanitarian programs. We are trying to help the poor people of North Korea. And they are desperately poor. Just like oil-for-food was an attempt to help the poor people of Iraq. So, I mean, this isn't money that is intended to go to finance Kim.

HENNINGER: The United States mission simply asks for some assurance from the UNDP that these programs were, in fact, doing what they were intended to. And they asked the agency to provide them with internal audits that had been done on the programs. And the agency, at first, refused to give them to the United States mission or to the others questioning them.

Finally, they did turn them over. Then, it was at that point, the United States started to raise questions about whether or not the programs were up and running or whether the hard currency was simply being funneled into Kim's nuclear pocketbook.

POLLOCK: But the history of developmental aid, unfortunately, even in Africa, is that, even with merely odious regimes, non-threatening ones, it usually serves to prop up those regimes.

I think the lesson we ought to be drawing out of this is you can't take — you can't take threatening regimes, like North Korea and Iraq, and think you're going to get to their people and get around the government.

RILEY: And another thing to remember is that the U.S. is the largest donor nation to the U.N. And if U.S. taxpayers start to question whether this money is being well spent, I think this justifies that.

GIGOT: Well, the executive board of the UNDP is meeting next week. And five countries, including the U.S., are going to ask for a deferral, I am told, of this program until they find out what is going on.

There are some people in the United States government which disagree with that because they don't want anything to interfere with the six-party talks. But six-party talks with North Korea can still go on even if this program is stopped.

Do you think the U.S. and these countries should shut this thing down?

HENNINGER: Absolutely. And I think a policy like that — and we did the say thing with Saddam Hussein — to say that is, in effect, to define dictatorship deviancy downward.

What it means is, if they have a nuclear program up and running, the most important thing is to negotiate with them on that, and allow them to commit this sort of barbaric behavior against their own citizens, no matter what, because we have to negotiate with them.

GIGOT: All right, Dan.

Panel, stand by.

When we come back, Condoleezza Rice tours the Middle East promising a renewed commitment to the road map and the eventual creation of a Palestinian state. Is there reason to hope?

Plus, the democratic presidential field got a little brighter this week with the added star power of Barack Obama. Can the political rookie give Hillary a run for her money?

Our panel weighs in on those topics, and our "Hit and Misses" of the week when the "Journal Editorial Report" continues.

(COMMERCIAL BREAK)

GIGOT: Secretary of State Condoleezza Rice, in a swing through the Middle East this week, said that she would soon bring Israeli and Palestinian leaders together in an effort to jump-start the stalled peace process.

The announcement follows up on a pledge Rice made last year to step up America's roll in resolving the Arab-Israeli dispute.

Michael Oren is a Senior Fellow at the Shalem Center in Jerusalem, and author of the new book "Power, Faith and Fantasy: America in the Middle East, 1776 to the Present." He joins me now in the studio.

Michael, thanks for joining us again.

MICHAEL OREN, AUTHOR, "POWER, FAITH AND FANTASY: AMERICA IN THE MIDDLE EAST": Good morning, Paul.

GIGOT: Secretary Rice is going back to the Middle East, like so many secretary of states have before her, trying to lend her credibility to solving the Arab-Israeli dispute. Is there evidence, in your mind, that she can succeed this time better than they have in the past?

OREN: Well, it is only true that Arab-Israeli peacemaking has been the litmus test of the prowess of every American administration going back to Harry Truman. And, alas, there have been few successes.

One of the more remarkable successes was the Egyptian-Israeli peace accord of 1979. And that negotiation worked because you had two leaders, Menachem Begin in Israel and Anwar Sadat in Egypt, who were very, very strong leaders. They had the support of their people. They were committed to the process.

And that is precisely what is missing today. You have Ehud Olmert, who is beleaguered. He's under investigation for criminal charges. He has the lowest rating of any Israeli prime minister in history, and is literally fighting for his political life, while Mahmoud Abbas is fighting for his life, period, facing a possible civil war.

So these circumstances would not tend to augur well for the success of Condoleezza Rice's mission.

GIGOT: Well, one of Secretary Rice's points — themes seems to be that she wants to augment the forces of moderation in the Arab world, which, I guess, would be the Siniora government in Lebanon, the forces of moderate Shiaism in Iraq and, in Palestine, President Abbas against Hamas.

Is that something that she can do? Is it possible? And how should she do it?

OREN: Well, certainly, it is a laudable aspiration on her part. The question is, does she have the wherewithal to do it?

Even in Lebanon, for example, you have a Lebanese government, which is a minority-ruled government. Because the largest single ethnic majority there are the Shiites, who are represented by Hezbollah, which has the least amount of power in the government.

Mahmoud Abbas represents a Fatah Party, which is widely suspected by Palestinians of corruption. And he hasn't done a lot of homework and house cleaning there.

So while the idea is very good on paper, in reality there are many, many obstacles that she would face.

GIGOT: What should the U.S. do to help the moderate forces in Palestine?

OREN: I think in supporting them through military aid, through economic aid is fine. But at the end of the day, Mahmoud Abbas has to clean his own house. Mahmoud Abbas has to win back the hearts and minds of his people.

The fact of the matter is, were the Palestinians to go to elections tomorrow, they would probably vote Hamas in for another electoral victory?

GIGOT: Really? Even though there's been no economic progress. And they've had, almost, the edge of civil war inside Palestine. You think they would really reelect Hamas?

OREN: Well, many Palestinians are not blaming Hamas for the economic dislocations. They're blaming the West. They're blaming it on Israel. They're blaming even America.

And Hamas has been very successful in making that case. It is not our fault. It is the imperialist American or Israeli fault.

GIGOT: What about the views inside Israel, the popular views after the war with Lebanon, and this idea of a two-state solution? Gaza, since Israel left, hasn't had — I mean, it's been awful there. Of course, the rockets rained down on Israel from Lebanon.

Inside Israel itself, is the idea of a two-state solution that separates Israel out from the territories, is that still something that most people believe is possible?

OREN: Well, you know, I live in Israel. And I served in this war last summer. And I came home from that war very distraught. Actually, the first time I've come home from a war — I have been in a few. I came home frightened, and frightened not of Hezbollah, but frightened about Israel and Israel's performance in the war.

GIGOT: Really?

OREN: Yes. What happened was Israel had withdrawn to two international borders, the Gaza border and the Lebanon borders. And it was on those borders where we were being fire at. Not because Hamas and Gaza and Hezbollah and Lebanon disagreed about where the border was, but because they simply wanted to destroy us. We didn't do so well in repulsing those attacks.

I think in Israel there is a deep sense that we are now — entered our post-Palestinian phase. That many Israelis have internalized the fact that there is no viable strong Palestinian government on the other side that is capable of sitting down with us and signing on an end-of-conflict treaty.

And, therefore, most Israelis now are thinking in terms of how can we separate from the Palestinian by a security barrier, by other means until such a time as internal changes in the Palestinian authority enable the emergence of a viable Palestinian leadership. And that's really not going to happen in the foreseeable future.

GIGOT: And in any case, it'll take a strong and popular Israeli prime minister with a mandate stronger than a mandate than — a stronger mandate than the current prime minister has.

OREN: Unquestionably. Unquestionably. We need someone of the magnitude of a Sharon, of a Begin, of a Ben Gurion.

GIGOT: All right, Michael Oren. Thanks for being here.

OREN: Pleasure.

GIGOT: We'll be right back after this short break.

Coming up, Illinois Senator Barack Obama is poised to shake up the democratic presidential field. But can he really compete with the well- oiled Clinton political machine? Our panel weighs in when the "Journal Editorial Report" continues.

(COMMERCIAL BREAK)

GIGOT: Welcome back. Illinois Senator Barack Obama announced this week that he's likely to enter the presidential race, adding a dash of glamour and excitement to the democratic field. But is he any match for Hillary Clinton?

Jason, Barack Obama has been in the Senate all of two years. I think even JFK was in there for about eight. Is this the right moment for Obama, 45 years old? What explains his political attraction?

RILEY: Well, whether it's the right moment, who is to stay. We are still a long way from the '08 presidential election. But it is a little easier to decipher what the attraction is. There are a lot of Democrats out there who are looking for an alternative to Hillary Clinton. And Barack is hoping to be that person.

He is charismatic. He's telegenic. He's a fresh face. And he could very well be that person. I mean, right now, he still speaks mostly in platitudes. He is an utterly orthodox liberal in terms of his views on abortion and gun control — abortion, gun control, taxes.

But right now, that's probably OK. I mean, his goal right now is simply to raise his profile.

GIGOT: But if you think about major presidential candidates, usually they are associated in some way with some cause or some issue, or something that they have accomplished. I mean, John McCain, campaign finance reform, national security. Hillary Clinton had health care. It didn't work for her. But she is associated, identified with a cause, something bigger than just personality and biography.

What is there about Obama beyond biography?

HENNINGER: Well, I think quality's, in large party, a product of the political system we have now which is — let's face it, the presidential campaign now runs almost 24/7 around the clock all the time. McCain and Hillary both have these huge organizations. They have been around for a long time. They are in our face constantly, right? I mean John McCain has been on television.

And it creates a space for something fresh. When someone as charismatic of Barack Obama comes along, you just feel, well, the other people are kind of stale. This guy is interesting. It is just a pure dynamic of television today.

POLLOCK: Yes, he's interesting for now. But what's going to happen when the campaign actually starts? He's going to have to start taking positions on actual issues.

And if you look at Obama's voting record, which is admittedly short, he seems to be fairly to the left of the American center.

And then, you look at his — as challenger, you've got Hillary Clinton, someone who can raise more money than anybody else, and who has a team that's experienced in the roughest of politics, which is going to be really important in this race.

RILEY: But Barack Obama can also try and use that inexperience to his advantage by sort of running as the outside candidate against the Washington establishment. This is something Bush did in 2000 successfully.

The difference this time is that that was pre-9/11. And will the country want someone sort of on-the-job training for a commander in chief in a post 9/11 environment?

GIGOT: Jason, you mentioned something interesting, which was that the country — that Democrats want a candidate who is the un-Hillary. But she's the frontrunner. Why are they looking for an alternative?

(LAUGHTER)

RILEY: Well, fatigue could be one reason. Obama will have to try and distinguish himself from Hillary. One way to do that might be the war. He wasn't in the Senate when they had to vote on the war. He could turn to Hillary and say, I told about Iraq. Some other candidates want be able to do that. So there are ways to use his inexperience to his advantage.

GIGOT: But the issue here is they're afraid she can't win, right?

HENNINGER: Yes, exactly.

GIGOT: Too much baggage, can't beat a John McCain or a Rudy Giuliani in a presidential race?

HENNINGER: Well, all of us talk to people, friends, all the time about the — and it is just amazing to me how often you can get into a conversation with a Democrat — often democratic women, about Hillary, and they will say she is not electable, too many negatives.

GIGOT: I'll tell you, I suspect that Hillary Clinton is not all that upset to get Barack Obama in, because he will divide up the anti-Hillary vote. She is still the overwhelming front-runner. And poor John Edwards, he has been completely eclipsed by Obama. So maybe she doesn't want — she doesn't mind him getting in.

POLLOCK: Well, on one front where she might mind is raising money. She had to spend a lot of money to get reelected in New York, back to the Senate again. And she did. And she has to raise more now.

Barack Obama could cut into her ability to do that, particularly out in California, which is where the Democrats want to raise money. He's out there already raising money.

(LAUGHTER)

GIGOT: She will have no problem raising $150 million. I'll tell you that.

All right, we have to take one more break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Item one, a hit for New York City Mayor Michael Bloomberg's new schools plan — Dan?

HENNINGER: Yes, that's right, Paul. Really, the biggest scandal in America is the state of the inner city schools. Mayor Bloomberg, in his State of the City speech this week, proposed three ideas that are really worth thinking about to address New York City schools.

One, he proposed more autonomy for principals, an idea that has been proven to produce effective schools. Second, tenure for teachers — he wants it to be a function of rising student test scores. And third, he wants to take that $15 billion New York City schools' budget and distribute it in a way that tangibly reaches the students and the best schools in the city.

Now, the unions, of course, automatically are going to fight these ideas. But New York has a big strong establishment. And it, including the press, ought to get behind these ideas and start putting an end to this scandal.

GIGOT: All right, Dan, thanks.

Next, House Intelligence Committee chair, Silvestre Reyes is at it again — Rob?

POLLOCK: Yes. You'll remember we talked about Mr. Reyes a few weeks ago when he couldn't get his Sunnis and the Shiites straight and which one was affiliated with al-Qaeda and which one was affiliated with Hezbollah.

Well, now, we have a really interesting flip-flop on Iraq from Mr. Reyes, who gave an interview in the December 5 issue of "Newsweek" magazine, saying that he thought what we should do is put in, very specifically, 20,000 to 30,000 troops with the aim of cutting down on the militia violence.

What did Bush do? He practically takes Mr. Reyes' plan and word and says I'm putting in 21,500 troops to cut down the militia violence. Reyes says, ah, we can't do that now.

Now, look, you can say this is just cynical politics. But, hey, maybe in his defense, Reyes could say that he has honestly changed his mind after reading up about the Middle East over the past month.

(LAUGHTER)

GIGOT: All right, Rob.

Finally, a miss to some anti-immigration conservatives for the treatment of Florida Senator Mel Martinez — Jason?

RILEY: Yes. In recent weeks, a small, but vocal group of conservatives have tried to derail the nomination of Mel Martinez to becoming to the next head of the Republican National Committee.

Apparently, the Senator is not sufficiently anti-immigrant because he supports reform that would include not only more border security, but a guest worker plan for immigrants already in the country.

Now, under this litmus test, not only would the current RNC chairman, Ken Mehlman, be banned from the job, but so would people like George Bush and Ronald Reagan, which gives you some idea of how far over into the deep end some people want to take the party.

GIGOT: All right. They want to make a pup tent. It's not a big tent party.

All right, that's it for this week's edition of the "Journal Editorial Report."

Thanks to Dan Henninger, Rob Pollock and Jason Riley.

I'm Paul Gigot. Thanks to all of you for watching. And we hope to see you right here next week.

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