Currency Reform: Rationales and Reasons

Several issues which become evident when comparing North Korea and Vietnam

North Korea undertook blitzkrieg currency reform (redenomination) on November 30th, converting its old currency into a new one at a 100:1 exchange rate. Yet the North Korean authorities, even after executing an economic decree akin to an emergency measure, failed to publicize the full story, raising speculation about the details of and intent behind it.

Therefore, due to the fact that the entire picture of the November 30th decree has yet to become clear and a significant number of variables still exist, it is difficult to evaluate the overall thought process behind the redenomination at this point.

However, this editorial takes a look at several points in the process of reviewing the November 30th decree.

What is interesting is the view that the recent redenomination may be an attempt to emulate Vietnam’s own currency reform measure of 1985. Two perspectives prevail regarding this.

One is the position which emphasizes the fact that the 1985 measure in Vietnam was actually led by a faction which opposed reform. According to this position, North Korea’s recent measure was not intended to follow Vietnamese-style market reform, but to suppress the market and to toughen the regulatory economic regime.

From the opposing point of view, this measure is considered an advance step towards reform and opening to a free market economy, just like that of Vietnam. This latter point suggests that North Korea will have no choice but to adopt Vietnamese style reforms if the redenomination measure fails to stabilize initial inflation.

What is important here is not only the difference in perspective between the two viewpoints, but also that the recent North Korean measure leads us to the following questions: ▲whether it is a measure to toughen the regulatory economy ▲whether it includes a plan to level prices by stabilizing inflation, ▲and the choices that confront North Korea if it is hit by inflation once again.

1. The intent behind the November 30th measure: toughening market regulations

Vietnam’s 1985 measure, at a conversion rate of 10:1, was rather moderate. Additionally, Vietnam’s currency reform was carried out simultaneously with price and wage reforms.

In contrast, North Korea tried to manage prices and wages through its 2002 July 1st Economic Management Improvement Measure. Although it did not carry out a redenomination at that time, it clearly had the idea of carrying one out from the beginning. Some of the new notes, dated 2002, provide evidence of this.

North Korea’s having delayed its redenomination by seven years whilst trying to emulate Vietnam’s 1985 measure is probably linked to the negative lessons of the Vietnamese model. According to a researcher in Japan, concurrent reform of the price and wage systems as well as the currency only fuelled additional turmoil in Vietnam.

The North must have feared such a development. Thus, after letting several opportunities to execute its redenomination pass, it finally carried out blitzkrieg reform this time around.

But this is where a key problem lies. After the 1985 measure, inflation did not stabilize in Vietnam. In 1986, commodity prices actually rose 487.3% compared to the previous year, and inflation only continued.

The reasons behind the continuing inflation were absolute insufficiency of production and rations. The Vietnamese authorities then subsequently adopted the “Doi Moi” policy, which focused on progress towards a market economy with the expectation of an increase in production and rations, in December of 1986. As a result of that policy, the price of commodities stabilized within a few years, marking the launch of genuine reform and opening in Vietnam.

Then what is the situation in North Korea? Since the July 1st measure, North Korea has recorded an annual rise in commodity prices of 300~400%. The gap between state-regulated and market prices exceeds 30~40 times. North Korea’s economic outlook is worse than Vietnam’s was. If the North attempted its redenomination to overcome these negative side-effects, then a policy which stimulates production must also be prioritized.

However, instead of that, the North has imposed policies which regulate the market. In order to suppress market activities, it has revised its penal code twice, in 2004 and 2007. From October 2007 it permitted only women over 50 years of age to engage in work in the jangmadang, and in July of this year it decreed the shutting down of the Pyongsung Market, which is the largest jangmadang in the country.

The currency reform measure this time around looks like a continuation of such trends.

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