Pyongyang mulls a stab at currency reform

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Pyongyang mulls a stab at currency reform
By Andrei Lankov 
Sep 8, 2012

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.

http://www.atimes.com/atimes/Korea/NI08Dg01.html