It has been almost three months since North Korea redenominated and replaced its currency. Through the currency redenomination, the North Korean regime sought to solve problems of inflation and expand its control over the economy. However, the currency redenomination was a failure.
Since the redenomination, production has decreased even further, prices and foreign exchange rates have soared, and the regime has taken a huge hit in terms of the trust of its subjects. As a result, reports suggest that the personnel in charge of the currency redenomination have been disciplined and the prime minister even came out and apologized to the people directly.
Immediately after the currency redenomination, most international experts predicted failure, and most asserted that it would make things worse. They were right, though most found it so obvious as to not be worth praising.
Which leaves us with some questions: Why did North Korean officials anticipate a different, better result? What kinds of changes will result for the North Korean economy? And is there a way which could be employed to normalize the North Korean economy?
There are three reasons for the failure. The first reason is that it was expressly anti-market. Since the distributive ability of the North Korean regime was crushed in the early 1990s, the citizens have survived by depending on the market. Not only that, however; in recent years, the public works system has also been supplied with finance and raw materials by the private markets.
Thus, both the public and private systems are dependent on the market, albeit to differing degrees. The problem lies in the fact that the regime tried to use the currency redenomination to wither the market, while ignoring the simple fact that its own system was also dependent on the very market it was trying to destroy.
At the same or a similar time, the regime attempted to transform general markets into farmers’ markets and also to restore the system of state-run stores. However, the shrinking of the market without the provision of an alternative caused production to collapse. As a result, even a highly unambitious state-operated supply chain couldn’t be maintained.
The second reason for the failure was the prohibition on foreign currency transactions. The crackdown on such transactions caused supply from the outside to dry up. It is a well known fact that most products traded in the North Korean markets are made in China. The only reason why so many products could be obtained from China before the crackdown was because transactions using stable currencies like the Yuan or dollar were possible.
Due to the outlawing of such transactions, however, trade with China slowed considerably and prices for those goods which were available soared. Citizens were aghast, and outbursts of discontent reached the outside world.
The third reason was a clear lack of understanding among North Korean government economists about the function of currency within the economy they were supposed to be managing. Traditionally, currency in North Korea was just the means by which the state controlled the public economy from above but, following the July 1st Economic Management Reform Measure in 2002, ration tickets disappeared for good and monetization arrived. Thereafter, currency became the transaction standard between individuals and the key method of accumulating wealth.
Therefore, by the time of the redenomination, currency was no longer simply the unit of calculation for the implementation of the latest state plan but the main asset and safety net at the forefront of each household’s attempts to survive. Therefore, the currency redenomination, which was planned to diminish the role of currency and ended up simply destroying the value of large swathes of private savings, was fiercely resisted by the people.
In addition, the North Korean regime gives the impression of having not one iota of understanding of a currency’s function in oiling the wheels of production. The announcement stating that only monetary assets equal to two months living costs for a family of four could be exchanged, and the subsequent ad hoc multiple revisions of said limit following displays of popular anger, suggest that the North Korean regime implemented the currency redenomination without any grasp of or interest in what constitutes a reasonable amount of currency to leave in circulation.
Considerable amounts of time will be necessary for the North Korean economy to recover from the shock of the currency redenomination. In the end, the North Korean regime will have to supply more currency, once again permit the usage of foreign currency and loosen market restrictions. Indeed, these things have already begun.
If these measures are implemented well, on the surface the economy will return to the time before the currency redenomination, however, a considerable amount of time will be required to create monetary circulation of sufficient volume to stimulate production and to establish a stable pricing system.
The most severe consequences the currency redenomination left behind were those of lost trust in the North Korean currency and uncertainty in the market function. Citizens have seen how monetary assets accumulated at the cost of blood, sweat and tears can turn to garbage in a day, and the way economic activity in the market can become illegal at the whim of the bureaucracy.
As a result, foreign currency transactions will grow more important to nervy traders, and foreign currency will become the main means of accumulating assets, taking large amounts of foreign currency out of the private economy. As a result, foreign exchange rates can be expected to soar rapidly and, in time, so will living costs.
This will be because increased production costs will be passed on to consumers, and this will put downward pressure on production.
In order for the North Korean economy to enter a normal growth course, the authorities are now left with absolutely no other alternative but to accept the market function in its entirety. The planned economy of North Korea has long since waved goodbye to most of its international backers; it cannot operate properly and it cannot recover.
Therefore, the North Korean regime must break free from the illusion of restoring the planned economy. The intention behind the currency redenomination was the restoration of state control. However, if the regime wants the succession to succeed, it needs to improve the citizens’ lives, not just increase its control over the economy. The stability of the system depends on it.
Decades after the leader promised “boiled rice and beef soup” to everyone and with no sign of it on the horizon, strengthening state control will only incite more and greater resistance. Most citizens already know that the government is neither willing nor able to give boiled rice and beef soup to them.
Therefore, the only choice is to introduce a system where anyone can have boiled rice and beef soup as long as they are prepared to work for it.
If marketization were to bear fruit, it would strengthen the North Korean system rather than weakening it. The evidence for this argument can be seen in the cases of successful developing nations which have prospered while ruled by dictatorial regimes. The North Korean regime has no choice but to incorporate the market economy in general and attendant policies to assist in its development in order to restore the capacity of the regime to function.
This is the only way to stabilize the structure of succession. The North Korean regime needs to understand the fact that it was precisely the opposite policies which brought it to the place it now finds itself in.
