Some old news, but it is the first time I read about north korea currency reform, I also heard that they raise the salary for normal workers by 100 times in the process, how genius
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On November 30, 2009, North Korea announced that it would exchange new currency for old currency at the rate of 100:1, spurring panic in the North Korean markets. The plan was announced to the public with little advance warning, catching individuals with large amounts of local currency off guard. As a strategy for exposing and impoverishing holders of excess local currency, the initial phase of the strategy was effective. A representative of the Korean Central Bank affirmed that “we are not moving toward market opening, but will further strengthen the principle and order of socialist economic management.” North Korea’s objective in pursuing the revaluation, therefore, was aimed at curbing the markets and reinstituting state control over the markets and over public reliance on the state. But given that objective, it is clear that as the currency revaluation process unfolded, it met with a variety of challenges that in the course of less than two months led to an unprecedented public admission of failure by DPRK Premier Kim Yong-il and the dismissal—and reported execution—of finance chief Pak Nam-gi.
North Korea's policy failure occurred at a variety of levels. At the technical level, initial implementation of the currency revaluation was undermined by the inability of the state to have sufficient goods on hand to restore the public distribution system as a replacement to the market. Moreover, the reforms themselves caused the markets to seize up, robbing them of the exchange needed to ensure that they continued to be well supplied with goods from China, leading to the breakdown of distribution of necessities in North Korea. A related failure was the difficulty the state faced in setting prices in the aftermath of the reform. The failure to get prices right also interfered with the functioning of the markets and made normal commerce difficult to conduct, leading to shortages of goods. Second, the state effort to expropriate hoarding of local currency and set the limit for exchange of new currency at impossibly low levels invited public outrage and a rather strong backlash among the people. In fact, the backlash was sufficient that the government was forced to undertake tactical readjustments to the ceiling on the amount of local currency that could be exchanged for new currency within days of the announcement of the initial plan. Each dimension of the failure contributed to exposing the major conceptual miscalculation behind the policy, namely, that it is possible to roll back the markets and return to the old state-centered distribution system of the past.
The Chosun Sinbo interview with Central Bank representative Cho Song-hyo'n states clearly the objective of the currency revaluation as follows: "In the future, a great deal of economic activities will be conducted not according to the market but based on the planned supply and circulation system, and it is expected that this will make it possible to further strengthen order in the planned economic management. . . In the past, the utilization of the market was partially allowed because the state was unable to satisfactorily secure the supplies needed for the production activities of enterprises as planned. The market was utilized as a supplementary means based on the principle of socialist economic management. We believe that, as the capability of the state has strengthened, the role of the market—which has performed its function as a supplementary means—will gradually dwindle."
For the state to restore its role as the primary source of distribution within North Koreansociety, it would be necessary for DPRK central authorities to restore government-led distribution mechanisms to a level that would allow it to replace the markets, along the lines of the way that the Public Distribution System (PDS) had historically worked. In order to do this, the state-authorized points of distribution would have to be stocked at levels that would be more reliable than the markets. Distribution of new currency into the hands of the people would strengthen ties of people to their work units and restore loyalty to the state. But the spike in demand for goods resulting from distribution of the new currencies, the impoverishment of those marketeers in North Korea who had used local currency as a medium of exchange to facilitate distribution of goods from China, the lack of small bills available initially in the new currency in the markets, and the failure of state-guided pricing to "stick" at the time of the introduction of the new currency all served to undermine the effort.
Central bank representative Cho states in his Chosun Sinbo interview that commodities were set at the price levels that had existed in July of 2002 when previous economic reform measures had occurred, "with the international market price of rice as the standard." But those prices proved to be far from the market price of goods, especially in the new currency under circumstances where demand was outstripping supply. As a result, hyperinflation made it impossible for the state to set effective prices in the markets in early December, further contributing to the breakdown of the market mechanism.
North Korean authorities took a second step against the markets by banning use of foreign currencies on December 28, 2009. The Daily NK reported that the official decree requires businesses to deposit all foreign currencies in banks, to be withdrawn after obtaining approval for use of the foreign currency. This measure was designed to further strengthen political control over foreign exchanges in order to “bring the black market under control." The measure essentially criminalized the unauthorized possession of foreign currency in an edict that endangered anyone conducting foreign trade outside of market channels. Having impoverished individuals most likely to be active in meeting market demand, the foreign currency ban criminalized those same individuals.
The third step was the most drastic: North Korean authorities shut down general markets across the country in order to transition them to farmers' markets. This shutdown exacerbated both inflation and the supply of goods inside North Korea, contributing to the spread of famine conditions in various parts of the country. Good Friends reported deaths by starvation in both North and South Hamgyong and North and South Pyongyang Province and a sharp drop in the value of the new currency in North Korean markets.
Stephan Haggard and Marcus Noland argue in their recent policy brief that North Korea's currency reform was confiscatory in nature, that "currency reform was designed to target groups engaged in market activities that not only generate cash earnings but also require cash balances given the underdevelopment of the North Korean financial system, while at the same time providing compensatory allocations to favored groups closely connected to the state." In the same policy brief, Haggard and Noland estimate inflation in North Korea to have exceeded 100 percent per year in the years following 2002 and dropped to double or single digit levels in 2007 before accelerating again in 2008-2009.
Following the surprise announcement of the currency reform, North Koreans were given only a week (from November 30 to December 6) to exchange old currency for new and faced strict limits on the amount of currency they were allowed to exchange, although these limits reportedly faced strong opposition from average North Koreans. Interestingly, in the face of protests, North Korean authorities adjusted the original ceiling of 100,000 won per individual to 150,000 won in cash and 300,000 won in bank savings. The most egregious mistake of the reform was a serious underestimation by the authorities of the extent to which market activity—and the resulting need for money— was being used to hedge against political control by the state.
The reopening of the markets was accompanied by a rare public apology in a reported meeting with government officials and local village leaders. Premier Kim Yong-il stated that "regarding the currency reform, I sincerely apologize as we pushed ahead with it without a sufficient preparation so that it caused a big pain to the people" and that the government "will do its best to stabilize people's lives." Media reports have also revealed that the alleged responsible official, Park Nam-ki, was dismissed in January as chief of the planning and finance department of the Workers' Party and reportedly executed in March for his failure to lead the currency exchange successfully.
