Wednesday, March 03, 2010

Ask a Korean! News: Currency Reform in North Korea (Part 2)

(Continued from Part 1 of the series. Original article in Korean here.)

Mission: Impossible, and North Korea's Utter Failure

There is little possibility that prohibition on foreign currency use, issued as a follow-up to the currency reform, would continue to be implemented. (*In fact, as of February North Korea gave up on the enforcement of the prohibition.) North Koreans who possess foreign currency right now are simply sitting on it, waiting for the time when the exchange rate stabilizes. (*The same today, which is about two months since this article was written.) They absolutely do not think that it would be impossible to use foreign currency in the future.

Another North Korean sources said on January 8: "It has been more than a month since the currency reform, but even today the exchange rate goes up and down by 100 percent so it is impossible to know the exact exchange rate," and added: "It will not be until March when the exchange rate between North Korean money and foreign currency would stabilize. Right now there are few transactions." (*The fluctuation in exchange rate is still great enough to cast doubt as to whether the exchange rate will stabilize in March. The stabilization may come in April.) To this reporter who raised doubt about the possibility of being able to continue using foreign currency under the regime's control, the source boasted: "There is no problem at all. It is not as if we have been using foreign currency because the government told us to use it."

The vast majority of North Koreans who are sitting on foreign currency is party officials. The officers who should be in charge of control are actually the ones who most desire the foreign currency ban to be ineffectual. Therefore, it seems likely that the power of dollar and yuan in North Korea will remain strong. (*This prediction by the North Korean source is proving to be very wise at this point.)

國際先驅導報, a Chinese daily, reported on January 7 that Joseon Trade Bank, North Korea's bank that clears trades, set the exchange rate between dollar and the new currency at 96.9 won per dollar. But North Korea's externally posted exchange rate is meaningless. Customarily so far, the exchange rate between dollar and yuan in North Korean black markets was nearly the same as that in China. In other words, if a dollar is exchanged for 6.8 yuan in China, the same rate holds in North Korea.

In addition, even the currency exchange counters in various regions that are run by the government exchanges foreign currency based on the exchange rate in the marketplace. In other words, the externally posted exchange rate is literally for show; even the regime itself does not recognize that exchange rate internally. (*Recently there has been a report where a high-ranking North Korean official admitted to this. There is no need for Korean media to even discuss North Korea's official exchange rate.)

Interesting thing to note is that the value of foreign currency in North Korea tends to go together with the price of rice, which serves as the standard for the value of goods in the marketplace. The rice price, in turn, goes together with the price of rice in the regions of China close to North Korea. Although there is a seasonal factor, usually rice in a North Korean marketplace costs around 1.2 times the cost in China, reflecting the cost of transportation.

The currency reform devalued the money 100 to 1, but it is likely that the reform will become ineffective and the price of goods will revert to the price previous to the reform. (*Even after 100-to-1 devaluation, the price of goods has already climbed to 25 percent of pre-reform price.) For example, right before the reform, rice cost 2200 won for 1 kg and 1 dollar was 3800 won in old money. According to the spirit of the currency reform, 1 kg of rice should be 22 won and 1 dollar should be 38 won in new money. But only one month since the currency reform, 1 kg of rice sells at 200 won and 1 dollar exchanges for over 100 won. (*At mid-February, two months since the reform, 1 kg of rice sells for 500 won in northern North Korea.) Because everyone is hiding their foreign currency in the face of foreign currency prohibition, the exchange rates for dollars or yuans are fluctuating by hundred percent in the same day.

At this point, the marketplace continues to operate as it did before the currency reform. While they have no choice but to show up at marketplace in order to eat and survive, the merchants and the people are confused by the price that runs on a roller coaster several times a day. As the regime decided to pay the laborers the same face value of salary as it was before the reform, the price will likely continue to rise. (*This is actually happening.)

The merchants at the marketplace are the ones who are harmed the most by the currency reform, but farmers on the other hand received the most benefit. Some farmers find themselves rich overnight because of North Korean farms' distribution system. Unlike laborers who receive a monthly salary, farmers receive their entire year's worth of compensation in cash around December through the distribution process. The distribution amount differs depending on one's "effort count".

An "effort count" is a numerical count of the daily labor performed by a farmer. The distribution amount, following the effort count, also depends on the amount of production each farm generated. Therefore, taking North Korea as a whole, a farmer family receives anywhere between several tens of thousand won to several million won. Last December when the farmers received their distribution was when the price for grain and goods, counted in new money, was the lowest. Farmers who anticipated the exacerbating inflation and the rise in price attempted to turn their entire distribution money into goods and sit on them.

This atmosphere is vividly reflected on the January 3rd report by Joseon Shinbo, the official newsletter for North Korean-Japanese Association [TK: 조총련], which described the throng of people at Pyongyang Department Store No. 1. According to the report, the department store spent a week from December 22, 2009 to procure 440 types of items, four million items total, in preparation for the New Year's Day. It must have been a significant strain on the regime to procure this much. But because of the size of the crowd on the morning of the New Year's Day, the department store opened at 7:30 a.m. instead of its normal time, 10 a.m. Just in the morning, 155 televisions and 550 sheets of blankets were sold.

The newsletter said, "There were so many customers that there was hardly room to take a step in the department store. The store at one point had to cordon off the entrance around 3 p.m. because the crowd was simply too big." It added, "There are high-earning families among farmers or miners." It also added, "Lee Geum-Ok, a farmer in Hyeongje-san District, said she received 50,000 won in distribution, and she along with all the farmers in her unit will buy a color television." Also noted is "One farmer who visited the department store that day said his entire family worked at the farm and earned 1.45 million won as a family."

Farmers are convinced that within a few months, the price of goods that they purchased will jump by several times or several tens of times. In fact, except for a few government-run stores in Pyongyang, the price of goods at the marketplace is furiously rising every day. (*The farmers' actions are proving to be a wise move. The farmers who immediately sat on goods with their distribution money made a significant gain.)

The price rises in large part because of stockpiling, not simply by farmers but by everyone. There are many who support the currency reform among those who are able to stockpile. But they do not necessarily expect things to continue to be better simply because their life right now has improved a little. Stockpiling is a reflection of that mindset; they believe that actual goods are much safer than the untrustworthy North Korean money. Because the wholesalers are keeping their goods in warehouses, and regular people are stockpiling what little goods that the regime procures or the grain that come out into the marketplace, the shortage in North Korea is increasingly getting worse. This feeds into the vicious cycle that leads into the rise in price.

Therefore, unless the North Korean regime finds an ingenious way to pull out the goods that individuals are hiding, the social unrest can only grow. Right now the regime is trying to forcibly cut off the supply chain of individually-owned goods by eliminating the marketplace, but that measure has little possibility of success. (*As expected, it has been proven that there was no real ingenious way, and the situation ended with North Korea simply recognizing the presence of the marketplace.) North Korean people, through their experience from the last decade, know that a transaction can happen regardless of time and place as long as they hold the goods.

This round of currency reform also provided South Korea with certain food for thought.

Shortly after the news of currency reform broke, South Korean media was flooded with the sensationalistic news as if riots were impending in North Korea. However, this reporter who investigated North Korea at the same time heard that the public opinion on the currency reform was in fact significantly favorable. Despite this, the media that relayed the currency reform news only contained the voices of angry North Koreans. (*As I said previously, the favorable opinion has changed in the last month and a half.)

Of course, there could be legitimate reasons. The North Koreans who can speak on the phone with South Korea are likely to be the victims of the currency reform. It is reasonable to infer from their ability to communicate with South Korea that they received a lot of money in the process as well. But even more so than these reasons, this reporter detected the prejudice in South Korea that, "North Korea regime can never do anything that may be welcomed by the people, nor should it."

The news of currency reform was relayed mainly through North Korea-related NGOs that engage in anti-Kim Jong-Il activities. It is difficult to blame a politically motivated group for publicizing only the information that is necessarily for their goal. (*Naturally.) But I believe that the media should not jump into that fray, looking only for sensationalistic stories. As long as it was sensational, a report by a nameless Taiwanese media company -- which Korean companies did not even glance at, and has nothing to do with North Korea -- would be quoted in the front page of Korean newspaper and the main story of Korean television news. (*To give a neologism name, it is a typical pingpong reportage.) Truly embarrassing.

Another interesting point is that it is getting increasingly more difficult for the traditional media to maintain its lead in North Korea-related news. In the Internet age when an individual could be a one-man media through such channels as blogs, the traditional media's advantage is disappearing. North Korea's currency reform starkly exemplified this trend. North Korea-related organizations poured out news related to the currency reform, and the traditional media did no more than following them and taking notes.

In contrast, it was the North Korea-related organizations who were engaged in a competition to break news. While these groups sometimes provided incorrect information due to excessive competition, lack of experience and understanding with the press, their political leanings, etc., more notable was that South Korean media does not have the ability to sufficiently distinguish the worthy North Korean news from the worthless ones. (*There were actual examples of simply taking dictations of information that was hardly credible.)

The reportage on the currency reform was also a symbolic moment of the presence of North Korean defector organization, while providing an occasion to question the ability of government agencies (run with a massive budget) to collect North Korean intelligence. While the defector organizations made reports on real time basis, the government only repeated for several days that it could not confirm. There were also reports that Intelligence Committee of the National Assembly continued to chastise the lack of intelligence gathering in North Korea. While the defector organization cannot yet collect much high-level intelligence, it is undeniable that their information-gathering power is increasing.

This reporter tried to avoid listing the current price in North Korea in this article. The price fluctuation and the regional differences in price are so great that, at this point, there is no such thing as a fair price. (*This situation is the same in February.) The North Koreans who were reported unanimously say: "Right now we just have no idea about what's what."

Truly, North Korea has now entered into chaos that North Koreans themselves have difficulty understanding. Even after more than a month since the reform, there is no sign of this chaos abating. (*At this point, three months after the reform, North Korea regime unconditionally allowed the marketplace to open in order to calm this chaos. In the end, the only solution for the chaos was to go back to where things were before the reform.)

That is the magnitude of the shock that the currency reform caused on North Korea. Can the North Korean regime stabilize this chaos and restore planned economy? Taking away the taste of market economy from those who already tasted them may be a Mission: Impossible. (*Conclusion -- Within three months, it has been proven that North Korea made an impossible challenge. It has also been proven that now, North Korea can never return to the planned and controlled economy.)

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