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The past month has seen an extraordinary spectacle in North Korea: the failure of a hastily announced “currency reform” and the subsequent collapse of the won, the official domestic currency. These developments are of more than numismatic interest. Pyongyang’s currency move marks the end of an era of hesitant economic experimentation and ushers in a new era of greater economic, and perhaps political, uncertainties.
The seeds for this crisis were sown long ago. The North Korean state has always had a deep philosophical problem with money–in anyone’s hands but its own. Money allows ordinary North Koreans to make economic choices about their own lives, decisions the leadership takes to be its purview alone. In the North’s “golden era” (before the end of the Cold War, into the 1980s), total wages and salaries ultimately accounted for barely one-fifth of national output. Apart from Pol Pot’s Cambodia, no other modern government has come so close to completely demonetizing a national economy.
Pyongyang’s alternative model provided a direct government supply of household goods through a public distribution system. This gave leaders near-total control over the consumption patterns of their subjects, but it also left the people almost totally dependent on what the state deigned to provide them.
With the country’s economic tailspin in the wake of the Soviet collapse, the system no longer had enough food in the pipeline to feed the entire North Korean population. There commenced a terrible famine, and an implicit change in the country’s social contract. People increasingly would be expected to look after their own needs. Surreptitious markets arose, with exchanges transacted via barter, primitive forms of reciprocation, and currencies of various sorts, including the North Korean won. Lacking the wherewithal that would permit the population to survive on public rations alone, the leadership was forced, from the mid-1990s onward, to tolerate a measure of private-market activity.
Late in the 1990s, as new international revenues (including dividends from the “Sunshine Policy”) began to flow into the Dear Leader’s coffers, North Korean leaders attempted to rebuild their badly broken socialist economy. But this took the form mainly of measures to strengthen central planning.
Then in 2002, the government suddenly enacted a flurry of economic measures. These actions never constituted the “reforms” they’re sometimes termed abroad, but they did mark a departure from the previous three decades. By downsizing official ration guarantees, raising both wages and consumer prices dramatically, and radically slashing the official exchange rate, the leadership significantly increased the sanctioned role of currency and markets (state-run and otherwise).
For a variety of reasons–possibly including unintended reverberations from the past decade’s nuclear drama–the remonetization did not work well. Too much new money was chasing too few goods, sparking significant inflation. By November 2009, the North Korean won’s black-market value in dollars was barely 5% of the level when the 2002 measures were implemented, a depreciation averaging over 3% per month.
The government attempted to redress these problems with a single swift blow. On Nov. 30, 2009, Pyongyang announced without warning an immediate “currency reform.” New won notes were issued for old ones on a 1-for-100 basis; no more than 100,000 old won per person (under $40 at unofficial rates) could be converted; and old currency was completely void at the end of the week. This amounted to an overnight confiscation of the overwhelming majority of won holdings by ordinary households, and severely disrupted the workings of the country’s already fragile markets for foodstuffs and other goods.
For the first time in the regime’s history, a Pyongyang ukase generated widespread public resistance visible to the outside world. International news coverage reported market women cursing their government, and even told of local riots that were only suppressed by force of arms. The government backtracked, conceding that slightly larger personal holdings of old money might be exchanged for new.
Belatedly, the government also apparently realized that foreign currency plays a role in North Korea’s consumer economy, too. By some estimates, the convertible foreign exchange holdings of families may total $1 billion or more, largely in dollars, yuan and euros. Three weeks after the currency reform, Pyongyang ordered that foreign currency could no longer be used in domestic transactions (as had been occurring, albeit illegally), and that all foreign notes must be exchanged at wildly unrealistic official rates. The won went into freefall.
The speed and depth of the won’s resulting plunge has been dizzying. The nominal market price of rice is reportedly higher today than it was in November 2009, before currency reform. This would imply 100-fold inflation and then some in just over one month. The won-yuan exchange rate along the North Korea-China border has reportedly dropped by almost 50% over the past month, even after discounting for the 100-to-1 currency conversion. The government apparently has no confidence in its own currency move, and is now betting against it. News reports indicate that Pyongyang this month is issuing soldiers in its public security forces twice their nominal monthly pre-reform wages (a 20,000% raise in light of the currency conversion). If the government finances more wage hikes like this by running the printing presses, it will turn the currency into a toxic asset no one wants to hold.
North Korea appears to be approaching the brink of hyperinflation. This carries several implications for foreign governments, none of them pleasant.
The era of timid official experimentation with economic policy is regarded as a failure by the regime and has come to a crashing end. Because the currency reform’s failure has so shaken the regime, the North’s “military first politics” may take on a more strident tenor even less conducive to engagement with the West.
The botched currency reform also has revealed how little North Korean decision-makers understand their own economy, much less the outside world. On a related note, the regime’s supposed heir apparent, Kim Jong Eun, was the mastermind behind the North Korean currency reform, according to South Korean intelligence. This may just be bad intelligence or disinformation. But if accurate, it raises disturbing questions about the judgment of the rising generation of North Korean leadership.
Meanwhile, Pyongyang’s currency machinations portend ominously for the country’s food situation. Although Pyongyang has managed to avoid mass death from starvation over the past decade, there is no margin of safety in the food system. The currency move has severely disrupted the private markets that are key to food security. North Korea is now one fateful step closer to a new famine.
The immediate consequences of the failed currency reform are bad enough already. But much worse may yet lie in store. Ordinary North Koreans are already bracing for this; Western policy makers should be preparing as well.
Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at AEI.
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