Pyongyang mulls a stab at currency
reform By Andrei Lankov
Some new trends have been noticed by North
Korean watchers: A number of articles have
appeared recently in the country's academic
journals that drop hints about the virtues of
currency reform.
In late August, Kim
Eun-chol, professor of economics at Kim Il Sung
University, the country's leading school,
published a paper in which he emphasized the
government's duty to keep money supply under
control. In July, North Korea's major economic
journal also stated that the amount of cash in
circulation should be controlled by the state-run
banks - for the sake of "further improvement of
people's living standards", of course.
Taking into consideration how North Korean
society is arranged (and the highly sensitive
nature of the topic), one can be certain
that neither publication
reflects intellectuals' pursuit of free,
inquisitive minds, but rather hints at the ideas
of Pyongyang decision-makers.
So, should
we be prepared for another currency reform? It is
too early to say, since there are valid argument
both for and against such a dramatic action.
Like most communist countries, North Korea
has an illustrious history of confiscatory
currency reforms, the most recent of which
occurred just three years ago. Currency reforms
with "socialist characteristics" usually follow a
similar pattern: One day, the lucky residents of
the country where the reform is to take place are
informed that their legal tender will, in a couple
of days or weeks, become worthless and that only a
limited amount of what they hold will be
changeable into the new currency. Deposits in
state banks are usually treated more leniently,
but the exchange period is short and the average
citizen finds himself facing numerous problems
even when trying to exchange cash within the
established tight limits.
In essence, such
reforms lead to the nearly complete annihilation
of privately held cash deposits and the dramatic
decrease of money supply in the economy. Legal and
semi-legal businesses within the private sector
suffer most - many of them face bankruptcy. But
such reforms help to curb inflation and reinforce
the state's leading role in the economy.
The last time the North Korean government
implemented such a reform was in late 2009
(previous reforms took place in 1992, 1978 and
1959). However, the 2009 reform seemed to fail
spectacularly to achieve its main putative
objectives.
There were good reasons for
this failure. Driven by rather obscure logic,
North Korea's state bankers decided that employees
of state enterprises (that is, the vast majority
of workers, at least on paper) would receive
exactly the same nominal amount for their work. In
other words, if say a steel worker received 3,000
won before the currency reform (a price of 1
kilogram of rice at the time), he would receive
3,000 won in the new currency as well. At the same
time, the exchange rate of old to new currency was
100:1, so the plan was that the new wage would
suffice to buy 100 kilos of rice. This amounted to
an overnight 10,000% increase in wages and in
effect a 10,000% increase in the money supply.
This policy unleashed an outbreak of rapid
inflation and predictably, within less than a
year, prices had returned to pre-reform levels.
One can only wonder why reform planners failed to
anticipate such a turn of events.
At the
same time, the 2009 reform led to dramatic
confrontations within North Korean society. Many
private businesses were indeed hit hard, but the
turmoil of late 2009 and early 2010 produced
popular dissatisfaction on a scale unseen in North
Korea since the late 1940s.
For a brief
while, in January and February 2010, a major
outbreak of public discontent seemed to be within
the limits of possibility. It took special efforts
to pacify the public (according to unconfirmed
rumors, some top officials were made scapegoats
and executed). It seems in fact that the
authorities realized their mistake and for a brief
while decided to leave the market and its traders
alone.
But recent publications emanating
from the North Korean propaganda apparatus seem to
suggest that the idea of a currency reform has
become a politically attractive policy measure
once again. One should not be misled by the
ostensibly "academic" credentials of the journals
in which the articles on currency reform appeared:
There is no such thing as independent academic
research in North Korea when political economy is
involved. This as an indication that reform is
being prepared, or at least seriously discussed,
in some quarters of the elite.
It seems
that North Korea's elite is worried about
inflation, which has over the past two years been
increasing steadily. Last summer, the average
exchange rate was 2,500-3,000 won to the US
dollar, while a kilo of rice would cost about
2,100-2,400 won. By last month, the exchange rate
had topped 7,000 won to the dollar and the price
of a kilo of rice was 6,000 won. In other words,
within a year, prices nearly doubled while the won
lost half of its value.
For North Korea's
decision-makers, this is clearly a worrisome
trend. It might be even more dangerous because
policymakers seem to considering economic
reorganization, maybe even genuine economic
reform. But an annualized inflation rate of 100%
is not a great place to start a transformation,
and something has to be done to curb this
dangerous trend.
Since currency reform is
a staple of government policy in North Korea, it
has become a well-known and well-tested economic
control measure. Therefore it is only natural that
the top managers of the state economy are keen to
launch a currency reform.
That said
though, currency reform is a very risky thing. In
2010, in the aftermath of the 2009 reform, even
North Korean officials sometimes spoke critically
about the reform when talking to Western
diplomats. Foreign students studying in Pyongyang
were approached by North Korean students who
expressed their angst about the currency reform. A
military attache of one Western country (not
exactly friendly from the North Korean point of
view) told me that his opposite number said
Pyongyang "doesn't quite understand what it's
doing". One can imagine how angry a military
intelligence officer in one of the world's most
controlled societies has to be to share his
frustration with an imperialist outsider.
The level of annoyance was truly
unprecedented. For a brief while, in January and
February 2010, a public disturbance, if not a
revolution, appeared to be possible. It is not
incidental that immediately after the reform, the
Chinese - hitherto very careful when it came to
North Korean issues - began to speculate almost
openly about the possibility, probability and even
inevitability of regime collapse in North Korea.
Therefore North Korea's decision-makers
are now facing a difficult choice: If inflation is
left unchecked, it may well undermine their
efforts to stabilize and transform the economy
while also leading to popular discontent. On the
other hand, another currency reform might provoke
an outbreak of popular discontent on a hitherto
unthinkable scale.
Reform clearly
constitutes clear political risks, but judging by
recent news, some people in the top leadership are
desperate enough to consider the option again. It
remains to see whether they will follow through on
their words, and whether they will survive their
experience.
Dr Andrei Lankov is
a lecturer in the faculty of Asian Studies, China
and Korea Center, Australian National University.
He graduated from Leningrad State University with
a PhD in Far Eastern history and China, with
emphasis on Korea, and his thesis focused on
factionalism in the Yi Dynasty. He has published
books and articles on Korea and North Asia. He is
currently on leave, teaching at Kookmin
University, Seoul.
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