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     Jan 5, 2012

A legacy of death and inflation
By Yong Kwon

The consequences of Kim Jong-il's shortsighted policies will reverberate through North Korea long into the future.

Even with the Dear Leader gone - he was announced to have died of a heart attack on December 17 - the regime is still responsible for the monumental promise he made to the nation: establishing a powerful and prosperous state by Kim Il-sung's centennial celebration in 2012.

The leadership could have arbitrarily called for an extended mourning period and subdued expectations, but it did not. The period of national mourning lasted just 13 days and the regime will be expected to fulfill its vow.

The new fledgling leader Kim Jong-eun and the late leader's inner circle face the immediate challenge of preventing the total

collapse of the domestic economy. The blind rush to achieve a semblance of prosperity has fallen dramatically short of its goal and now the entire country is spiraling head-first towards another famine; As was the elder Kim's grand legacy.

So how will Pyongyang express its power and prosperity in 2012 as the country teeters on the brink of economic meltdown?

Alongside acquiring food aid from the United States without compromising its nuclear capabilities, Pyongyang's primary objective will be geared towards curbing rampant food prices and bringing inflation under control. Although this may not appear as spectacular as a show of military might, the stakes are high as this will be the first real test for the regime in the post-Kim Jong-il era.

Some North Koreans enjoyed temporary material well-being in the last years of the despot's rule. Foreign observers have noted that the denizens of Pyongyang have cell phones, wear more fashionable clothing, receive reliable electric power, etc. However, the short-term benefits of the regime's economic policies will have a serious impact on the long term well-being of the country's 24 million inhabitants. After all, nothing comes without a price.

Since the disastrous currency reform in the winter of 2009-10, North Korea's economy has been in flux. The redenomination of the North Korean won not only obliterated personal savings accounts in the Chosun Central Bank, it also deterred people from trusting the government with their assets.

In a desperate measure to increase savings, the bank instituted higher interest rates and eased access to savings. [1] This, in conjunction with the emergence of private markets, may have temporarily staved off mass starvation and even spurred relative increase in material wealth.

However, the pre-existing disparity in personal income compounded by unequal access to cash has now produced a serious imbalance in the economy. The increased demand for food in more prosperous areas like Pyongyang has prompted prices to rise, rendering the much needed grain too expensive for large portions of the population. [2]

With the Public Distribution System practically non-existent, the people do not have a social safety net when the market fails. This is especially true for urban dwellers who do not have private gardens or small hillside patches to rely on for food.

The increased availability of cash in the North Korean economy has created other economic woes. Before the currency reform of 2009, the availability of money was suppressed by the central bank that often confiscated up to 20% from individuals' accounts.

In order to instill trust in the central bank, the interest rates have been raised and people have been allowed to withdraw from their savings without being subjected to state-sanctioned theft. While allowing North Koreans to access their savings unimpeded has obvious benefits, it also created a sudden increase in the money supply which invariably produced inflation.

Plenty of other governments have attempted to boost economic activity by increasing the money supply, but this method has been heavily criticized by many economists as a socially inequitable and unfair method of resolving economic stagnation. Especially because the inevitable inflation often constitutes an invisible and arbitrary tax that most heavily impacts the poorest members of the society. This scenario is even truer when the economy is contracting like in North Korea.

The current situation in North Korea effectively illustrates the consequences of irresponsible expansionary monetary policy.

According to studies by Marcus Noland at the Peterson Institute for International Economics, the cost of rice has increased 131% and 138% for corn since 2010. [3] In addition, Noland observed that unlike in 2010 when the price of the grains fell following the harvest, the prices of grains have continuously increased unchecked in 2011. Overall, basic goods are now more expensive than they were before the currency redenomination two years ago. [4]

North Korea has been facing an overall deficit in grains for a while, but Pyongyang's overhasty economic policies may have exacerbated the unequal distribution of the much desired foodstuffs.

Because of the inflation, many sources report that North Koreans are turning to US dollars or Chinese renminbi (yuan) to secure their assets. However, with the North Korean won continuously devaluing against both currencies, the people will have a harder and harder time finding ways to protect their possessions.

The biggest challenge for the new regime will be to resolve these immediate hardships. Restricting the money supply and controlling food prices may be operationally challenging and unpopular, but the alternative is completely losing control of the economy.

Humanitarian non-governmental organizations and international organizations have already warned the world about the seriousness of the situation in North Korea; ghastly reports of malnourished children being hospitalized and the prevalence of starvation-related diseases wreaking havoc.

Now with winter setting in, North Koreans may also have to make the difficult choice between fuel and food. If the inflationary pressures remain, vast portions of the population will starve or freeze to death by the end of the winter.

It is difficult to conceive of a way to prevent mass starvation without relying on US assistance; at the same time, it is hard to imagine Pyongyang genuinely surrendering nuclear capabilities or curving weapons exports to be offered the much-needed aid.

The danger lurking around the corner is the possibility of North Korea falling back on anti-Americanism to channel the public's distress away from the falling living standards. It will not be a particularly difficult task as the state propaganda apparatus has already pointed to US-led sanctions as the key source of the country's hardships.

According to some sources, Kim Il-sung engaged in provocative actions in 1968 precisely because of this: to convince the people that sacrifice was necessary for national security. [5]

What does this mean for 2012?

Provocative actions carry the additional cost of discomforting or alienating North Korea's key regional partners who currently provide crucial income, investment and development.

However, if North Korea's imploded economy bottoms out even further, then Kim Jong-eun or whoever takes charge of the regime may feel the need to bolster state legitimacy by displaying its military capacity and portraying the US as an immediate threat.

Kim Jong-il's death has augmented uncertainty in the region and consequently thrust the respective military forces to prepare for military action. The potential for a serious crisis has always been present on the Korean Peninsula, but under these circumstances when the dangers are acutely severe, any presumption could spell disaster.

We remain sincerely uncertain about North Korea's future. However, it would be a grave error for any party facing the North Korea predicament to underestimate the merciless edge of a regime working in the margins.

1. North Korea's Chosun Central Bank, interest rate of 5.4%? Maeil Kyungjae, March 1, 2011. English translation available at North Korea Economy Watch.
2. Yong Kwon. Food Before Politics on North Korea. Asia Times Online, October 6, 2011.
3. Marcus Noland. Inflation in North Korea. North Korea: Witness to Transformation, December 5, 2011.
4. A collection of recent reports on North Korea's inflation and domestic food prices have been compiled by North Korea Economy Watch .
5. Mitchell Lerner. Mostly Propaganda in Nature: Kim Il Sung, the Juche Ideology, and the Second Korean War. Woodrow Wilson Center: NKIDP Working Paper series #3, December 2010.

Yong Kwon is a Washington-based analyst of international affairs.

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9. Iran ends 2011 with a blaze of intelligence

10. Angels and inquisitors

(24 hours to 11:59pm ET, Jan 3, 2011)


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