Why revalue and replace the currency, and why do it now?

The chief reason for this practice in a market economy is to bring about market stability and forcibly regulate inflation. However, the North Korean case is different. Most experts are confident that the goal of this week’s measures was market regulation and suppression rather than economic stability. The belief seems to be that the venal and repressive North Korean regime wants to retrieve those funds that have been circulating in the markets and toughen regulation.

In addition, when executing a nationwide policy such as currency reform, timing has important implications. In other words, “Why now?”

Specifically, it bears repeating that North Korea is not a state based on rational economic principles, but one which prioritizes ideology, politics and the military to the exclusion of all else. These factors are considered first and foremost when deciding key national policies. Among them, the goal of maintaining the Kim Jong Il regime is of paramount importance.

Therefore, the political factor must be assessed long before the economic factor. From a position of knowing this underlying and inescapable fact, one can reveal the real reasons behind the currency reform measures this time around.

First, the most important “duty” of the North Korean regime is to maintain the stability of the system on route to the third-generation dynastic succession. The most important year for that succession will be 2012. The North Korean authorities claim that, by then, they will have built a strong and prosperous state.

Thus, the currency redenomination bears all the hallmarks of a desire to induce the value of the North Korean currency to superficially correspond with the value of the Yuan. Currently, according to black market rates in the jangmadang, one U.S. Dollar is worth 3,800 won while one Yuan is the equivalent of 597 won. Putting economic reasons aside, the recent measures (including the 100:1 exchange rate) seem laced with the political ambition to achieve some sense of parity with the latter.

According to one high-ranking defector, at one point Kim Jong Il also tried to bring the exchange rate between the Japanese yen and the North Korean won down to 4:1, stating that “Japan needs to be suppressed.” At one point, Japanese tourists in Pyongyang apparently suffered from ridiculously priced commodities due to the suicidal 1:4 ratio. Of course, we have already realized that Kim Jong Il’s decisions really have nothing do with economic considerations. The currency reforms this time around embody Kim’s politically-motivated intention that there should not be a wide gap between the North Korean won and the Yuan or, to a lesser extent, the U.S. Dollar.

Second, the moves seem intended to punish the newly rising wealthy classes, whose money has been and is earned in North Korea’s capitalist markets.

As the jangmadang grew following the July 1st 2002 Economic Management Reform Measure, the number of so-called “large hands” increased due to profits made from trading with China. But an increasing number of wealthy persons means more people with less reason to submit to Kim’s absolute power, which is threatening to the maintenance of the dictatorial regime. Also, Kim is probably going to have given thought to the fact that those wealthy classes, a portion of the power elite and the military elite could end up in cahoots behind-the-scenes, again endangering his regime. He may have felt the need to crush such developments at source.

In truth, the power elite and those who have accumulated significant wealth from trading probably hold more U.S. Dollars or Yuan than North Korean won. Kim Jong Il has no systemic means of regulating this fact besides ordering crackdowns masquerading as unofficial “investigations” led by the National Security Agency or People’s Safety Agency, but through this week’s reform he has at least been able to put the brakes on their rapid accumulation of wealth.

So, logical to Kim though the reforms may be, it has to be said that there are risks involved; the ripple effect of the currency reforms on the sentiment of North Korean civilians will not be insignificant.

Currently, the extent of North Korean citizens’ reliance on the market for their survival is extremely high. Through the market, a great many people cover their living, medical and education costs. Meanwhile, the group which has been most heavily hit by the reforms is the intermediary currency traders. They tend to carry significant clout in the jangmadang and play a role in influencing civilian sentiment, although with some limitations. It is difficult to anticipate what kind of influence they will have moving forward; those who survive the latest threat will certainly remember who their friends are.

It is clear that the recent measures will contract the market in the short-term. But a forced contraction of the market such as this invites even greater resistance from North Korean citizens, who see their ability to survive being directly threatened. Therefore, it is important to keenly observe the aftermath of the reforms, which will be more evident three or four months from now.

On various levels, however, winter 2009 for the average North Korean citizen is looking extremely frigid.