Ask a Korean! News: Currency Reform in North Korea (Part 1)

As always, Mr. Joo Seong-Ha brings the latest news about North Korea -- this time, about the recent currency reform. Mr. Joo made this post in two parts, and the Korean will do the same. Part 2 will come later.

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Currency Reform and the State of North Korea in 2010

I wrote this article on January 5, about a month after the currency reform in North Korea. Nearly two months have passed since, and right now there are many parts of the situation that are very different compared to early January. Despite that, I think it is meaningful to understand North Korea and compare the projection and the reality.

Yesterday, there are articles that say North Korean regime completely permitted marketplaces, and it also nullified the ban against foreign currency use. Given the initiative, I thought North Korea would at least hold out until February, but North Korea was much weaker than I thought. I added further explanation behind the * mark in places where the projection and the current reality differ.

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On November 30 of last year, the news of North Korea's sudden currency reform broke. Since then, the news of the currency reform's progress would fly from North to South every minute. Observing this currency reform, I really thought the times have changed.

North Korea actually reformed its currency in 1992 as well. But there is little known in South Korea about the situation at that time. But this time, the numerous North Korean cell phones connected to North Korea-related NGOs are fully engaged. Countless calls must be being made from North Korea to South Korea as we speak. This change only took 17 years. In the age of 18,000 North Korean defectors, the curtain secrecy that North Korea has so strenuously controlled no longer has any power.

This currency reform is not merely a reform of currency. Through currency, North Korea attempted to put the social system that had been derailed from the socialist ideology back on the old track, and nullify people's wealth created through market economy. Therefore, this reporter does not think "currency reform" is not the appropriate term. But in this article, rather than making up a strange term, I will continue to use "currency reform" as it has been customarily reported in the media.

This round of currency reform is based on the same idea as the currency reform in 1992. In July 1992, North Korean regime suddenly issued a directive that each family would receive new currency up to 300 North Korean won, and the rest should be deposited. Few expected this reform. New money, held in the province offices, were distributed. The money was not printed in North Korea; it was printed in Eastern Europe several months ago and sneaked into North Korea. Later, it was rumored that the money was printed in Czech Republic. The secret trains that carried the money to Pyongyang moved to each province capital under strict security. It took about half a month from the moment the money arrived from abroad to the moment when the currency reform was announced. Those who were involved in the transportation of money moved under the prison-like control, unable to go home for security reasons.

Although the regime only promised to exchange 300 won, there was no strong resistance. The amount is worth three months' salary, considering that average laborer earned around 100 won on average. At that time, North Korean currency had some value. If one reported to the workplace, one received rations. Of course, there were times when the rationing stopped for months in late 1980s in certain areas in northern North Korea. But seeing North Korea as a  whole, people could receive 1 kg of rice for 8 jeon from the ration center. 8 jeon is a discounted price from the government, and the actual price of rice in the market was around 3 to 4 won. Liquor and meat would be rationed on holidays; 1 kg of pork would be around 7 won.

Given that North Korea has no unemployment, currency reform did not directly affect everyday life because the workplace continued to provide salary and ration. There was also not much resistance because the regime made families to deposit money in excess of 300 won with a bank. Problem was that they could not withdraw the money later. It took several years for North Koreans to realize that they had been deceived by their government. Also, because the markets were not active at the time, there were very few people who were sitting on a very large amount of North Korean money -- usually Chinese Koreans or Japanese Koreans in North Korea.

The currency reform that provided only 300 won per family was faithful to the socialist concept of equality, as everyone starts with the same amount of money. For all these reasons, the currency reform at the time passed over without much resistance, and the impact of currency reform on North Korean economy was negligible.

Perhaps because of that sweet memory, North Korea implemented an egalitarian measure this time just like 1992. The regime made each family change 100,000 won in old money into 1,000 won in new money, redenominating its currency by 100 to 1. Also, each family, rich or poor, received 100,000 won from the government.

But 2009 is fundamentally different from 1992. As the regime could not provide ration since mid-1990s, North Koreans have been relying solely on the marketplace. In 2009, nearly 15 years since, there is a massive difference in the wealthy and the poor. Currency reform fell like a bolt of lightning on people who were sitting on a large amount of money, relegating them to the same amount of money as their neighbors who were living day-by-day. The regime is telling people to deposit money in excess of 100,000 won, but North Koreans at this point know from experience that money in the bank is not theirs. Of course, a rich family did not completely fall to an equal plane as their neighbors, as they own nice houses, expensive electronics and foreign currency. But broadly speaking, the wealth differential among people has been reduced.

Because of that, many North Koreans support this currency reform. The greatest supporters are the class of people who continued to report to a workplace as the regime told them to -- which includes laborers, farmers and intellectuals. (*Note -- this group supported the currency reform as of early January, but around late January they turned into a strongly dissatisfied group, as food became scarce because inflation rose murderously and the market disappeared.)

This group had no choice but to report to their workplace even though they may have preferred to work at a market, because various punishments such as forced labor awaited them if they did not report. But there are few who receive ration from their workplace. They would receive about 3,000-4,000 won in monthly salary, a pittance that can barely buy 2 kg of rice. Those who report to work could not help but become jealous and envious of those who accumulate wealth through market while giving all kinds of excuses not to report to work.

As the same laborers mere 10 years ago have separated into the rich and the poor today, the sense of deprivation grew among those who lost out, which led to the dissatisfaction with the system. Workers would often complain that they no longer knew if North Korea was a capitalist society or a social society. But this round of currency reform sacrificed the class of people who accumulated wealth from the market. It is natural that the anger of this class, who lost their hard-earned money in an instant, rose sky-high. In other words, a class of strongly dissatisfied group is born in North Korea. But of course, there is little possibility that their anger would lead to collective resistance.

On the other hand, the workers strongly welcomed the measure, calling it long overdue. They also enjoy a certain measure of schadenfreude over the people whose money was confiscated. Retired pensioners also welcome this policy. Pensioners' purchasing power is greatly enhanced -- with their pension of around 1,000 won per month, they can now buy over 10 kg of corn instead of 1 kg. (*Note -- as of now in late February, about 4 kg of corn.) Of course the purchasing power would drop as inflation worsens, but as of now it is true that the purchasing power for workers and pensioners has been greatly enhanced. (*As of late February the purchasing power of a monthly salary is still higher compared to pre-currency reform, but the speed of inflation is beyond imagination.) Riding on the wave of this support, North Korean regime is trying to implement the second stage of the currency reform, curbing the wealthy class that purchased expensive houses with foreign currency. (*Only attempted, not actually implemented.)

It must be noted that right after the currency reform, the regime designated January 8, the birthday for Kim Jong-Un (the third son of Kim Jong-Il,) as a holiday. This is to induce the implication that under Kim Jong-Un's rule, there will be policies for the people. The current situation, where the regime is enjoying favorable popular opinion for the first time in a while thanks to the currency reform, could be the best opportunity for the regime to naturally inform people of the third-generation succession plan. From this perspective, the currency reform could be the regime's sophisticated plan to prepare for the third-generation succession. (*But now its failure is utterly exposed.)

There are another reason for the currency reform other than the realization of egalitarianism and preparing for the succession -- to restore the regime's control by resurrecting the planned economy and recapturing the human resources, scattered into the market, back to the structure. On the surface level, this could be the most important reason for the currency reform.

So far, there has been no circulation of currency where the money issued by the government would return to the government's bank. No matter how much money was printed, the money would immediately go into the coffers of the merchants and would not come out. Of course this is because banks lost credibility by not returning money that was deposited. The regime continued to pour water into a bottomless jar by continuing to print money, which led to serious inflation. There are also rumors that the Chinese organized criminals are circulating counterfeit North Korean money in a large scale, although this rumor is hard to verify. Because of these factors, North Korea instantly turned the money it issued into scrap paper through currency reform.

For some time going forward, the regime's power will become greater, as it has the authority to issue money. In order to induce laborers to return to the workplace, North Korea began paying the same face value of salary in the new currency. Because of this measure, it is expected that the currency reform would somewhat recover the regime's control over its people. (*Because the regime surrendered to the market forces much faster than expected, the restoration of control over people hardly occurred.)

But it is a stretch to think that the support for the currency reform would lead to some level of revival for North Korean economy. In order for the success of planned economy through the currency reform, the supply of goods must follow -- a critical condition. The regime's calculation is to have people return to the workplace and produce goods, inject those goods to the government's supply system and have them purchased by the people -- in other words, restoration of the socialist economic circulation.

But now, even if the workers show up to their workplace, they cannot work because they have no raw material. In other words, the success of the currency reform depends on North Korea's ability to provide raw material to its factories and companies. (*Now, it is being proven that the currency reform began without such ability, which doomed the currency reform from the start.)

In addition to the production raw material procurement issue, another important issue is the ability to circulate goods through the government-controlled networks instead of marketplace. This is so because that ability would create the money circulation that goes through the government's banks instead of the merchants' pockets. Considering this, it is being said that North Korean regime had imported a large quantity of goods from China and sold them through the government-controlled stores just before the currency reform. Some say that China's leftover inventory created by the global financial crisis is now coming into North Korea in the form of aid.

But the regime's importation of goods has a limit. Right now it can barely fill some number of stores in Pyongyang. (*As of February the limitation has been proven -- even the Pyongyang stores no longer receive supplies.) In order to control outside of Pyongyang, the North Korean regime is trying to close the mega-marketplaces which served wholesalers within the next few month, and force the goods to be sold through the government-controlled supply chain. (*Currently these attempts have been fruitless.)

In other words, the second round of the fight against the existing market forces has begun. But the merchants, severely damaged by the currency reform, are not following the regime's orders. They know from experience that the market forces never benefit by following what the regime told them to do. The so-called "big hands" of the market, namely the suppliers of goods necessary for North Korean life, are sitting on their goods since the currency reform, observing the situation. One big reason is that they cannot figure out the appropriate price after the currency reform since the price has been violently fluctuating. They are also calculating that over time, the price of goods will increase. (*The merchants are sitting out even after three months since the currency reform, and the prices are skyrocketing as they expected.)

As the "big hands" stopped supplying goods, scarcity is occurring in all areas. There are also families who starve because rice is not being supplied. (*There are rumors of starvation deaths by late January.) Mindful of the scarcity, the regime rationed some amount of food to the people, but the ration was a one-time event. The regime is also making an effort to sell the goods that it procured through government-run stores; in other words, the regime itself is trying to take the role that the market "big hands" used to play. But already there is evidence that the regime is overmatched. There are few who believe that the regime can continue even this level of effort for more than a few months. (*In fact, it could not even hold on for one month.)

One "big hand" of North Korea said in a call in January, "I can't send the goods to the market, so I can only wait for the right time while having three warehouses full of grain and goods." It is probable that every warehouse in North Korea is full of goods which the merchants are sitting on like this. They are waiting for the moment when the government withdraws and the price escalates rapidly. (*The situation is the same today.) The regime may be taking the place of the merchants today, but the merchants will take back their place when the regime is defeated in this role. (*As late February the regime raised the white flag, but the merchants did not reassume their role because the market price is too volatile. To date, North Korea's marketplace has no master, and the chaos will reign for the time being.)

This situation is providing a hope that the currency reform, implemented for the purpose of restoring the planned economy, ironically can serve as a catalyst for further international openness from North Korea. This is so because it is likely that North Korean regime, in order to match the market forces, will rely foreign relations in order to supply the goods. In fact, this is the only choice for the North Korea to avoid defeat from the market forces. If the regime loses here, there is no guarantees that the system can survive. (*This hypothesis is proving to be true to a certain extent. There are signs of North Korean desperation, such as the establishment of a developmental bank or rumors of a plan to raise $1 billion in foreign investment.)

It is very meaningful that on December 17 of last year, Chairman Kim Jong-Il visited the northern city of Rajin-Seonbong and that the Supreme People's Council Standing Committee issued a directive that said, "Ra-Seon city will be designated as a special district." Attempting to resurrect the Rajin-Seonbong free economy and trade zone, which had been practically dead, belies the intent to host foreign investment. North Korea has amply learned the lesson that foreign investment does not come in only because the regime wants it to come. The fact that the regime is willing to start again by designating Rajin-Seonbong as a special district despite that lesson may imply that North Korea is ready to yield to the international community. (*In early February, there was a report that North Korea will designate ten more special economic zone in addition.)

It must also be noted that since the new year, North Korea is leaking remarks that appear to foreshadow an inter-Korea summit meeting. Because the regime set light industry and agriculture as the most important task, it would try its best to produce results that can be shown to the people. Also, there is a possibility that Chairman Kim Jong-Il will visit China and receive a massive aid in exchange for responding to a demand related to the six-party talk, that North Korea would receive a groundbreaking economic aid through inter-Korea summit, or that North Korea would normalize relations with Japan and receive a large amount of compensation for the past history. Of course, any of the choices above requires a bold determination from North Korea. (*Measures like these will be presented when North Korean regime's ability to maintain its system is at the brink, but it has not yet come that far.)

--Continued in Part 2--

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