Globalaffairs

Issue 19/February- March 2010
By Alexandre Calvo Cristina

The North Korean regime devalues its currency, forcing the population to exchange their savings. Each North Korean family can only exchange 100,000 Won (around 50 Euro), the remainder being confiscated. The decision is a major step back for the budding economic liberalisation of the country.

Devaluation of the North Korean currency

North Korea is in the news once again, and as usual the news is not good. This time, however, the news is not about nuclear testing, the interception of a shipment of non-conventional weapons or a border incident, but rather it is about an economic policy. On November 30, without any official warning through the conventional channels, the government used its Orwellian video system that gives them access to all homes in order to announce that all old bank notes will be replaced by new notes, thus devaluating the currency by 100. That is to say, 100 old Won will be converted to 1 of the new official monetary units. One day later, the small diplomatic body accredited in Pyongyang was informed.

Due to the official silence, the main source of information about the details of the happenings in this isolated country has been the North Korean merchants active in China. Several of them have declared that the devaluation began on the afternoon of November 30 through the exchange of bank notes of 1,000 Won for new ones of 10.

So far, this policy could be regarded as a simple re- valuation perhaps aimed at making the lives of the population easier by eliminating two zeros in all economic transactions, or a way of hiding price increases caused by past inflation, however, the government has also established that each family can only exchange 100,000 Won (500 Euro according to the official exchange rate, but the equivalent of a mere 50 Euro on the black market). The rest will be confiscated.

This policy seems to be aimed at punishing those who have benefited from the timid liberalization that started at the beginning of the decade.

According to several sources, notable chaos and anxiety was generated amongst the North Korean population, and in particular amongst the merchants active in private markets, when the measure was announced.

The following are among the incidents that have reached the South Korean and Western media:

• Strong tensions and family disputes in the city of Sinuiji, close to the Chinese border. — According to one of its inhabitants “The cries and fights between couples have not stopped for a minute. The atmosphere in the city is terrible”.
• The suicide of a couple of pensioners in the province of Hamgyong. This is an area adjacent to China in which a lot of illegal commerce takes place.
• The fears of many local civil servants in the provinces close to China that the policy will cause an uprising.

The lack of transparency concerning the scope and the grounds of the policy has contributed to the social alarm as has the closure of establishments declared by the government as the exchange of the bank notes is carried out. To this must be added the fear of not being able to buy food of those families who have not yet received the new bank notes.

According to some sources, the strong reaction of the population has forced the authorities to increase the amount of funds that can be exchanged from 150,000 Won in bank notes to 300,000 Won in bank deposits, once the source of these savings has been established.

On December 2nd, two days after the devaluation was announced, only those businesses and restaurants that charge in foreign currency were open in the capital city. These are a small number of establishments that cater for the reduced number of foreign residents in Pyongyang and the privileged minority. The remainder is expected to stay closed for at least a week, while the bank notes are being exchanged.

Long distance coaches were not running and all kinds of services were closed, ranging from hair dressers to saunas.

The economic reform of North Korea

The policy is a step backwards in the timid liberalisation of the economy that began in 2002, when the government decided, following the deaths of millions of North Koreans in several famines in the previous decade, to open up private markets where food and other necessities could be purchased. The measure was very successful among both farmers and consumers.

The creation of these markets, followed by a reduction in the official rations, combined with a generalized but illegal black market, has allowed the majority of the population to survive and reach a modest standard of living that, however, is much higher than that which the official economy would afford them.

At the same time, these free markets have created a new middle class that though small is clearly visible to foreign visitors. A tell tale sign is the craze for mobile phones in the capital city.

The benefits of these new markets have not been distributed equally. The rural areas, producers of food stocks, are amongst those who have benefited the most, while the North East, an area of state industries, has been watched the changes anxiously. Nevertheless, the close proximity of this area to China has allowed it to conduct a generalized trafficking of products with the neighbouring country.

The impact of the policy

The limited economic reform described above has, as mentioned, created a small middle class. This group is the main victim of the new currency policy, as they are faced with the loss of the biggest part of their savings overnight.

Although many will have been aware of the possibility that the government take such a measure and will therefore have diversified their earnings by for example buying foreign currencies or precious metals, not everyone will have had this opportunity. In addition to the risk of being identified by the government as someone who possesses this type of capital, the small merchants need to have a certain amount of available cash in the North Korean currency to purchase the stock they sell and because this is the currency they are paid in by their clients.

This is why the lowest members of the new middle classes, in many cases small part-time merchants who were looking to supplement their miserable salaries or pensions, will be the ones most severely punished by the confiscation.

The better to do families, that have taken advantage of the steps the government has taken towards a certain liberalization of the economy thus acquiring notable capital, will also suffer because of the new policy, however only a small part of their fortune will most likely be in the form of the national currency.

Another matter altogether concerns relatives of the governing classes, who were possibly forewarned of the measure or can sidestep it in one way or another.

The devaluation and confiscation measures are unlikely to be forgotten by the population, especially by the participants in the small market economy that, whether tolerated or operating clandestinely, are breaking through. As a consequence, alternative currencies such as the US dollar or the Chinese RMB will be used even more extensively.

Political motives and analysis

The government has justified the measure, that has been transmitted to the population through their regular propaganda, claiming that the uprising of a new social class that does not fit in with the official economic model, based on strict economic planning had to be nipped in the bud.

It has also claimed that the measure will help reduce the inflation rate by reducing the amount of money in circulation.

Even though the tough economic situation of the past years has forced Pyongyang to take small steps towards a certain tolerance of private economic transactions, this does not mean that the political leaders are opting for the “Chinese model”, that is economic liberalization under strict political control. Ideological considerations aside, the Korean Workers’ Party (KWP) seems to fear that a gradual advance of the economy towards a market economy will unavoidably lead to the emergence of opposition parties.

This serves to explain why these measures have often been followed by a change in direction and attempts to return to the strictest form of Stalinist orthodoxy.

Notwithstanding, the regime, which is currently plagued by rumours concerning the possible succession of Kim Jong-il, is not as monolithic as may seem, or at least it is conscious of the possible resistance to the devaluation of the national currency.

Although a considerable part of the population might support the measure either because they have been indoctrinated by the official ideology or because they are envious of those better off, the political leaders are aware that there will be many who will lose out due to the measure or will simply oppose it.

This might be why the government has presented the measure as the brainchild of the current Prime Minister, Kim Yong-il, even though the policy will most likely have been approved by the top leader, Kom Jong-il in person. Some experts feel the brains behind the measure might be Pak Nam-gi, the director of the Financial Planning Department of the Labour Party who is in charge of the civil economy of the country.

Attributing the measure to Kim Jong-il will allow the government, including his possible successor, to distance themselves from the policy, in case it is unsuccessful or provokes general discontent or unrest. By presenting the policy as a personal initiative of the Prime Minister, the government leaves the door open to a hypothetical continuation of the economic reform.

Final reflections: economic reform and political transaction. Safety in Oriental Asia

Fifty-six years after the armistice that put an unfair end to the Korean war - the North Korean regime is still very much isolated and hostile to foreign contact, spending the major part of their defence budget and it does not allow a market economy to develop in spite of the continuous failure of their centralized planning.

The different measures adopted by successive South Korean governments, aimed at a certain level of economic cooperation with the North, have not been fruitful. Several communication channels have opened up, including regular merchandise transports by rail and ship, an industrial estate has been created (in Kaesong), and a tourist area (in the mountains of Kumgang, of major cultural and religious symbolism), but several incidents have paralyzed the projects for the larger part, thus rendering them unsuccessful for the time being.

Seoul’s aim promoting these initiatives is twofold: on the one hand contribute to overcoming the enormous mistrust on the part of Pyongyang which leads to continuous incidents, and on the other hand try to close the gap in the standards of living in the two Koreas. The difference is much bigger than that between the two Germanys at the time of the reunification, and Seoul, who has taken note of the expense at which West Germany has adopted the Eastern Länder and of how they currently still weigh down its economy, has preferred to try to smooth out the differences before a hypothetical change of politics in the North that could enable a possible reunification of the peninsula.

Pyongyang on the other hand has different concerns, or rather one concern; the continuity of its regime. Internally this has led, as mentioned above, to a continuous implementation of measures of economic reform only to then rescind them for fear of them leading to a loss of control on the society. Externally meanwhile, the regime has opted for dedicating vast resources to the maintenance of an enormous, but obsolete military machinery. This machinery includes non-conventional weapons whose purpose is threefold:

Firstly, elevate the cost of a hypothetical invasion. Let us not forget for example the proximity of the South Korean capital to the border. Therefore this is a classical example of dissuasion.

Secondly, obtain income or other weapons through warfare commerce with other regimes. This type of agreement is widely documented as Pyongyang has knitted an obscure net that unites other countries that are considered a threat to global peace.

Finally, North Korean diplomats have been very successful at utilizing the existence of a system of non conventional weapons to obtain a series of economic aid and political counterparts such as South Korea, the United States and their allies, who fearsome of a new open war on the peninsula and with a large part of the military capacity compromised in the Middle East and central Asia have opted for chequebook diplomacy to persuade the regime to at least join their nuclear military programme.

Against this backdrop, described in brief, one can ask what is the transience of the measure being analysed here? Its importance lies in its impact on two of the three ways in which communism could disappear in North Korea:

Military defeat of the regime. Very likely in the case of renewed hostility given that the large volume of troops of the military hides a considerable weakness on technological level as well as in areas such as aviation. Nevertheless, neither South Korea, nor the United States wish to pursue this option.

Internal uprising. It is very difficult to predict the probability of this happening. The lack of information makes it impossible to feel the pulse of the public opinion, while the population is subject to strict controls which complicate any opposition activity. Notwithstanding, in some similar cases, regimes that seemed very stable turned out to actually be quite fragile.

Gradual evolution, starting with economic liberalization that allows the creation of a middle class. This type of measure would lead to pressures to democratize the country, following the model observed in countries such as South Korea or Taiwan.

As for the second possibility, the devaluation has undoubtedly caused unrest among many parts of the population, but due to the isolation of the country, it is difficult to gauge how strong this reaction has been as well as its impact in the long term. Moreover, it is a step backwards on economic level and can lead to a worsening of the already complicated economic situation, evidence of which is the around a quarter of the youngsters called on to do their military service are exempt for medical reasons, the majority because of malnutrition suffered in their childhood and adolescence.

As for the third option, the regime’s policy has put an end, for the time being, to the gradual introduction of market mechanisms which supplement and in the long run substitute the centralized planning that once again is leading to nothing but hunger, cold and death.

Considering the restructuring that the regime is currently going through and that might be behind the devaluation, it will most likely be necessary to wait at least a few months to see whether the measure is a sign that the economic planning continues to be the cornerstone of the North Korean economy for the coming years or whether it is the last bastion of an orthodoxy that is destined to follow the path taken by China thirty years ago.

Alexandre Calvo Cristina
Lecturer of international affairs, European University.

The views and opinions of contributors expressed herein do not necessarily state or reflect those of Global Affairs