Value context and insight. lkm@koreatimes.co.kr
Dollarization rules North Korea economy
By Lee Kyung-min
By Lee Kyung-min
“Dollarization” is the most notable aspect of North Korea under the Kim Jong-un regime, an inevitable result of a weak economy whereby the North Korean won fails to function as a currency, a state-run think tank said Tuesday.
Otherwise known as currency substitution, dollarization is a term for when a foreign currency is used in addition to or instead of the domestic currency as legal tender.
According to the North Korea Review published by the Korea Development Institute (KDI), the North's economy led by its young leader Kim Jong-un is sustained largely by foreign hard currencies including the U.S. dollar, Chinese yuan and euro.
“In the past, foreign currencies served a limited purpose including purchase of high-priced assets or to replenish foreign reserves,” the study's lead author Lee Suk said.
“However, foreign currencies play the core function in running the economy now. For example, they are used to price products, complete economic transactions and serve as a general standard for measuring economic activities.”
In layman's terms, it means that a person borrows money in dollars, not in North Korean won, to import goods from China.
Then the person sells them in dollar prices in the market, and repays the creditor the principal and interest all in dollars.
Foreign currencies will become more crucial for the North's economy, a force that will push the regime closer to opening up its economy, he assessed.
“For the economy to keep running, the North will need to have a steady or greater flow of foreign currencies from outside, which will be impossible unless trade volume with China increases,” he said.
Greater dependence means greater vulnerabilities, a path to more complete and full integration into the global economy, he said.
“For now, dollar-mediated economic activities are driving the change, but soon, not only the real economy but the rest of the economic sector will be integrated including the labor market where workers will be paid with dollars,” he said.