Botched currency reform

By Andrei Lankov
Korea Times columnist

When last November North Korean authorities launched a currency reform, the journalists rushed to give their (almost uniformly negative) appraisals of this act. He rush is understandable: indeed, public needs fresh news. However, it usually takes months, if not years before the results of any major policy decision became obvious. Alas, by the time when unbiased appraisal becomes possible, few journalists are willing to re-visit the issue.

It seems that the dust sort of settled down by now, so it is perhaps a time to discuss how the 2009 currency reform impacted the North Korean economy.

The reform itself can be described as both usual and unusual. It was usual since similar reforms have been conducted by the North Korean government and, for that matter, other communist governments a number of times. The reform’s goal is simple: to reduce the amount of cash available and annihilate private savings which were created by the activities outside the officially sanctioned state economy. By doing so, the communist state rewarded its loyal workers and penalized those who dared to make money in private sector.

A reform of such type is prepared at utmost secrecy. Then one morning the populace is told that all old banknotes become void. The old banknotes can be exchanged for the new ones, but only within certain ― very short ― period of time, and only within certain ― very moderate ― limits. This means that the black market operators instantly loose all their cash deposits.

This is what happened in North Korea on November 30, 2009. However, the reform had a interesting twist. The banknotes were denominated, so 100 “old” won were proclaimed to be equal to 1 “new” won. However, the wages and salaries in the state sector were to be paid in the old nominal. In other words, a worker at a state factory who received 2500 won prior to the reform was to receive the same 2500 won after the reform, even though the price of all goods and services decreased hundredfold. Effectively, this meant a 10,000% increase of salaries.

This decision probably has no precedents in the world economic history. Of course, it was bound to produce inflation on huge scale. It remains to be seen why such bizarre policy was introduced, but the present author suspects that the idea came from Kim Jong Il himself. The North Korean dictator seems to be losing touch with reality recently, so he might have decided to reward a loyal part of population by increasing their income.

Of course, the result was the opposite. Within few weeks the economy was in complete disarray. Attempting to regain control, in early January the government closed down the markets. They also closed the hard currency shops where the North Korean elite could buy quality goods paying with the US dollars or Japanese yens.

The result was a further deterioration of situation. The then reports of riots seem to be exaggerated, but it is clear that discontent reached hitherto unthinkable scale. A number of foreign diplomats, aid workers and students, currently living in Pyongyang, told the present author that their North Korean interlocutors, including high level officials and military personnel, openly expressed their dissatisfaction with the situation and put blame on the government’s planners. It was very unusual: never before North Koreans dared to openly criticize their government’s actions while talking to foreigners.

In early February, the government realized that it could not restart the state-run public distribution system, and ordered markets to resume operations. Few months later, in May, a new set of instructions explicitly said that markets activity should not be inhibited by excessive restrictions. The hard currency trade resumed as well.

According to some rumors, Pak Nam-ki, an official who was responsible for the reform was executed. The present author is somewhat skeptical about such claims: the execution was never reported in media, and hence should be treated as yet another rumor. Nonetheless, the government retreat was quite visible.

Meanwhile, the 10,000% increase in salaries led to a predictable result: the retail prices sky-rocketed. In the time of writing, a kilo of rice costs some 1000 “new” won at a North Korean market. This is some 60% of its price a year ago. So, some cash was confiscated indeed, and relatively speaking the income of the wage earners increased. Still, the average monthly salary is sufficient to buy 2-3 kg of rice, so populace still has to augment their income by market trade and small-scale household production.

So, what are the results? Contrary to many alarmist predictions, the currency reform did not lead to a complete economic disaster. Nonetheless, the regime’s authority suffered a serious blow: its inability to handle economy was for everybody to see. This time responsibility for the failure cannot be possibly put on some external forces. So, the North Korean regime shot itself in the foot. Strangely enough, in recent years such badly planned and self-defeating actions are becoming increasingly common.

Prof. Andrei Lankov was born in St. Petersburg, Russia, and now teaches at Kookmin University in Seoul. He can be reached at anlankov@yahoo.com