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Pyongyang Loses to the Market

Park In Ho  |  2010-02-04 23:56
The easing of restrictions on trade in general markets likely represents a failure of the governments plan to revive state-run stores and the socialist economy as a whole.

Market restrictions were put in place after the currency redenomination on November 30 of last year, and began being lifted on February 1, as The Daily NK reported yesterday.

In Yangkang and Hamkyung provinces, existing markets have apparently reopened, and the rising cost of food appears to have stabilized somewhat as a result. In Onsung, a city in Hamkyung Province, rice, which had been more than 400 won per kilo late last month, had dropped below 250 won within 48 hours of the move.

A sharp spike in exchange rates after the December ban on the use of foreign currency has also flattened out to normal levels. Sources say that on February 3, money changers in the vicinity of Yeokjeon-dong, Shinuiju were purchasing dollars for 330 won each, a significant drop from the 500 won rate recorded late last month.

The lifting of regulations over the market just two months after their implementation looks like the result of serious social unrest and popular unease due to faltering internal mechanisms of supply.

After the redenomination, the North Korean authorities began exerting full-scale control over the markets to facilitate collection of the old currency and kick-start circulation of the new. Consequently, foodstuffs and basic necessities were to be sold only by procurement stores and state-run stores respectively.

However, this alternative failed for a number of reasons.

North Koreas grain harvest last year is said to have been below average, but the actual rations distributed to farmers were the highest since 2000. Although there are regional differences, distribution levels amounted to roughly 400 kilograms of a mixture of rice and corn per household. So, farmers had enough to eat.

Also, market regulations had caused rice to rocket to roughly 400 won per kilogram on the black market, so there was no incentive to sell goods in the procurement stores, where the fixed price was 40 won. Thus, collective farms and farmers did not sell rice to procurement stores

Moreover, farmers received a bonus payment, between 16,000 and 150,000 won in cash, so they had another reason not to release rice onto the market.

Finally, the government required procurement stores to buy rice for 40 won from collective farms and sell it on to customers for 20 won. This was clearly unsustainable.

The ban on foreign currency usage, which was issued by the Peoples Security Agency in late December, also paralyzed food circulation. Due to a strict crackdown on foreign currency usage, Chinese food smuggling through the border routes drastically declined and wholesale trade also noticeably decreased.

Thus, currency redenomination, which was initiated for the purposes of restoring the socialist distribution order, resulted in the rapid deterioration of peoples living standards. In some provinces, around mid January, there were reportedly people dying of starvation.

The North Korean authorities were trying to follow a series of steps towards recovering the socialist economic system; currency redenomination, market closure and banning foreign currency usage. However, experts on North Korean issues point out that these measures were neither effective nor realistic from the beginning.

In order to return to the socialist economic system, they should have taken steps like this; restore the production system, readjust state-designated prices, restore state-run stores, close markets, ban foreign currency usage, and then redenominated the currency. The North Korean authorities carried out the policy in reverse.

Finally, it turned out that restoration of state-run stores was practically impossible.

In order to recover state-run stores, state-designated prices needed to be set at the new denominations value first, but the new denominations depreciation exceeded the value of the old ones. Therefore, deciding state-designated prices became impossible.

Even if the authorities had tried to enforce state-designated prices, there was little chance that the people would have traded according to the new standards. This is because the capacity of state-run stores to meet the peoples needs could never be greater than the jangmadangs.

If the scale of state-run stores in Pyongyang, the only special supply region, is hereafter downsized, the national plan to restore state-run stores and go back to the socialist economic system will have ended in abject failure.

Additionally, if distribution from Pyongsung, the main wholesale market for the whole country, is restored to its level at the time before the redenomination, it will imply that the market is here to stay.
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Won Pyongyang Sinuiju Hyesan
Exchange Rate 8,000 8,000 8,025
Rice Price 4,800 4,900 5,200