Page 1 of 4 North Korea earns breather with currency curbs
By Ruediger Frank
The Foreign Trade Bank of the DPRK (North Korea) issued document No DC033
10-004, dated January 29, 2010, to diplomatic missions and international
organizations present in North Korea. They were informed that the use of
foreign currency was to be stopped, payments were to be made in the form of
non-cash checks, and that the official exchange rate of the euro to the North
Korean won (KPW) was changed from 188.2 KPW to 140 KPW, effective January 2,
2010.
Foreign institutions and organizations now have to obtain non-cash checks from
the Foreign Trade Bank, denominated in KPW, in order to pay for accommodation,
meals and service fees in hotels, fares for transport services like railways
and airlines, communication charges, inspection fees, registration fees and
commissions paid to institutions and enterprises in the DPRK, fuel, office
materials, spare parts for vehicles, electricity, water, heating charges and
rent.
Bank transfers are now mandatory for any transfers between international
organizations and all money paid to institutions and organizations of the DPRK
(including the salary of DPRK citizens working in embassies or international
organizations).
A recent visitor to Pyongyang confirmed in a talk with the author that
individuals are subject to a cumbersome process if they wish to purchase
anything. Rather than using a standard hard currency or exchanging it into the
new won, they now have to obtain a receipt stating the price of the goods they
want to buy, then present this at a desk where they exchange their money into
exactly the needed amount of North Korean money, and finally return to the shop
assistant, hand over the exact amount, and receive the product.
In the preceding weeks, North Korea had made international headlines related to
what seems to be a concerted economic policy initiative. The domestic currency
was reformed in a way that obviously aimed at reducing the amount of money in
circulation. A few weeks later news emerged that the use of foreign currencies
was banned.
This is no doubt a dramatic move with far-reaching consequences. Money matters
for personal lives and for society, so when a country initiates a currency
reform, it has significant repercussions.
But what are these consequences for the specific case of North Korea in early
2010? Are people in various sectors of society better off now, or worse? Will
the economy benefit or suffer? Do the reforms promote or impede foreign trade
and investment? Will the domestic political situation become more stable, or
will it deteriorate? Are the economic reforms of 2002 reversed, or were they
intended to be a temporary measure from the outset? Should we even interpret
the currency reforms as part of the process of power succession?
Money and its functions
To understand the possible motives and effects of the above-said measures, it
is helpful to briefly remember what money is actually good for.
People living in market economies, no matter how regulated or liberal these
are, usually take it for granted that money serves as a means to store value,
as a medium of payment and exchange, or as an accounting unit. Money translates
most of our multiple and complex preferences created by taste, custom,
shortage, future expectations etc. into one common language. By expressing the
subjective and context-sensitive value of goods and services in terms of money,
these goods become objectively comparable both domestically and across borders.
This is essential for rational decision-making on many levels for individuals,
society and the state. Thanks to money, we can designate a good as cheap or
expensive and decide whether to or not to buy it. We see whether the wage for a
particular job is high enough or too low, a factor upon which we base
employment decisions. Money helps to determine whether a person is rich or
poor, and on this basis should be taxed heavily or receive welfare benefits. A
producer can readily see whether costs exceed revenues, and whether the return
on investment justifies the time and labor spent and the risk taken.
Money has important political functions beyond the individual realm. Central
banks can promote or slow growth by adjusting the interest rate. We consider
people poor if they have less than a certain amount of money available per day,
and may call on the state to intervene if managers receive "excessive" bonuses.
Money is used to determine and fine-tune policies such as minimum wages or
social welfare. Money is also a simplistic but powerful tool to quantify the
size and growth rate of an economy. In one word, our whole lives as individuals
or as a group, would be unthinkable without money. This is hardly new - but
still far from being the universal norm.
Money and socialism
Unlike communism, which is an ideal society that is often said to require no
money, socialism is not a moneyless economy. Socialism is a child of the
ideal's ugly sister, reality. As such, it is posited as an intermediary stage
en route from capitalism to communism.
In socialist theory, the political power of the working class has already been
established, but in society and economy many remnants of the old capitalist
system and values still persist and need to be overcome step by step. Money is
one of these. Communist theory posits that the storage of value, the exchange
of goods and services, and accounting will no longer be necessary.
Superabundance of everything makes the issue of dealing with scarcity - which
is what economics is all about - obsolete. Hence, under communism, there is no
need for money or other forms of private property.
However, despite claims by overambitious political leaders or their badly
informed Western enemies, communism has never actually been achieved. The
duality of socialism and communism is much more than just a subtle difference
or a synonym. When we look at the role of money in the Soviet Union, the former
Eastern Bloc, or North Korea, it is clear that socialism is the name of the
game.
One distinctive feature of socialism in these countries is that it is not a
moneyless society. However, money as such clearly stands in conflict with the
political and ideological idea behind socialism. The result is a somewhat
schizophrenic situation. On the one hand, money is disdained and restricted as
a source of evil, but on the other it is needed for the orderly conduct of
economic affairs in naturally imperfect socialist societies and hence is issued
and circulated by the state, wages are paid in money and money circulates in
markets.
The functions of money in socialist economies are nevertheless severely
constrained. Most prices are set by the state for political reasons and do not
reflect relative scarcity. Access to money alone is often not enough to
purchase something; goods must also be physically available, one has to have
access, and sometimes even a permit to buy. Individuals may think that they
store value by accumulating money, enterprises may attempt to do rigorous
accounting, bureaucrats may believe that they maintain fiscal stability, but
they cannot know for sure.
Money in socialist societies is only imperfectly exchangeable into other goods.
It can only with strong limitations be used to estimate the absolute value of
something, and even relative value (for example, "how many months must I work
for a car?") may be indeterminate. Under socialism, prices keep sending signals
- but frequently the wrong ones.
In any society, the flow of goods and services must be regulated somehow. If
money is incapable of accomplishing this, coping strategies emerge. These
include barter trade, the use of foreign (hard) currencies, or the use of
political capital. Regarding related effects, the experience of the Eastern
Bloc is rich and telling (see, among others, Rudiger Frank and Sabine Burghart,
eds, Driving Forces of Socialist Transformation. North Korea and the Experience
of Europe and East Asia).
North Korea - A 'better version' of socialism?
Its undisputed particularities notwithstanding, North Korea is a socialist
economy, one in which the action of market forces is severely limited. For a
long time, it looked like a textbook case of Janos Kornai's (1992) model of a
classical socialist economy. For decades, there was no free interplay of supply
and demand, prices were set by the state, and coordination of economic
activities took place centrally and via administrative tools rather than
spontaneously and regulated by money. The focus of production was on quantity,
there was no labor market, and barter trade was dominant with socialist
partners and domestically. However, until the mid-1990s, unlike its Eastern
European brothers, North Korea had not excessively violated its own ideological
and political principles in terms of running the economy.
Most importantly, North Korea was long able to avoid the most dangerous
political effect of being poor - embarrassment. Unlike in East Germany, there
were no capitalist cars driving the country's highways. Under the transit
agreement effective since 1972, West Germans could use East German highways on
their way to West Berlin from Hamburg, Hannover or Munich. This earned the
forex-hungry East German state an annual fee payable to the Foreign Trade Bank
of initially 235 million deutschmarks, rising to 525 million deutschmarks in
1989. The political price for what seemed to be a good economic deal was high.
Millions of families, crammed in their outdated, noisy and smelly, yet still
beloved and cherished Trabant or the slightly better Wartburg, Skoda or Lada
cars, saw their pride crumble to dust on the Autobahn as Mercedes, BMWs, Audis
and the other shiny products of Western car makers drove by slowly (they were
careful to observe the speed limit, as hefty fines were another source of hard
currency for East Germany). Propaganda did its best to point to the downsides
of capitalism, but to no avail.
The number of visitors from South Korea, Japan or other Western countries to
North Korea was small and their movement was restricted. No parcels were sent
regularly to the North by their Southern relatives. In East Germany, hundreds
of thousands of parcels arrived for the Easter and Christmas holiday seasons.
And an East German state-run company called "Genex" even specialized in
arranging gifts from West to East by mail-order catalogue.
In North Korea, at least in the pre-DVD age, no Southern TV could be watched,
while Western TV was legal since the 1970s in East Germany for most of the
population. With the exception of rare film festivals, there were no foreign
movies in North Korean cinemas. North Korean youth might have heard about South
Korean pop-stars, but they were not omnipresent as Western music was in East
Germany. Until a few years ago, hard-currency stores were rare and the
possession and use of other than the domestic currency was banned in North
Korea. Unlike East Germans travelling to Prague or to Lake Balaton in Hungary,
North Koreans abroad did not feel like second-class Koreans, the ones with the
"wrong" won, since few could travel abroad.
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