Comrade can you spare a Won?

Dow Jones Newwire

PYONGYANG — At the foreign exchange counter at the self-proclaimed ‘deluxe’ Koryo Hotel, an electronic screen posts the daily rate of the North Korean won against various international currencies.

Quotes for a dozen or so currency pairs light up in red digital numbers, one after the other.

One rate that doesn’t shift too much is the dollar-won, which generally hovers at or around 2.16 won to the dollar. Speculation has it that the government has fixed the won’s rate against the dollar around that level to commemorate the February 16 birthday of Kim Jong-il, the country’s semi-divine leader.

Sounds strange? The fact is, in this quasi-theocratic country, if it looks like adulation, it probably is. This is, after all, the nation that holds a weeklong exhibition (in mid-February, of course) to admire the Kimjongilia, the national flower.

In any case, whether there is a peg at 2.16 or not, North Korea’s currency bears little relation to economic fundamentals.

Indeed in the Rajin-Sonbong trade zone in the north of the country, where the government has experimented with a free market rate, and along the Chinese borders where there is an active black market, the rate of the won tends to be more like 200 won to the dollar, analysts say. That’s a difference of a hundred fold – making the North Korean won one of the most distorted currencies in the world.

“The pricing of the won doesn’t have any particular relationship to any economic cost concept,” explains Bradley Babson, a senior advisor to the World Bank who specializes in North Korea.

That may have made little difference in the Soviet-style planned economy that has characterized this country’s economy to date. However, as the country tentatively opens its doors to international trade and investment and toys with the idea of using at least some elements of a market economy, currency reform will become vital, analysts say.

Ideological Aversion to Money

Unfortunately, other than the experiment in Rajin-Sonbong, there is little sign the country’s Communist leaders are prepared to take this step yet.

Monetary reform North Korean-style, the latest round of which took place in the early 1990s, has normally been focused on confiscating funds from overly rich entrepreneurs – not exactly the kind of adjustment the IMF would endorse.

At issue is the official Communist ideology which views money as a dirty instrument of capitalism. As such, its role within the economy should be kept to a minimum.

As Deok Ryong Yoon, an economist at the Korea Institute for International Economic Policy in Seoul, explains, until 1990, the North Korean won served not as money at all, but purely as an accounting unit.

North Korean residents didn’t need money because all their needs were met by the state distribution system – one of the most complete anywhere in the Communist world.

That is now changing. “Nowadays people use money and monetization is quite advanced,” says Yoon.

What doesn’t seem to be changing, however, is the government’s attitude toward money. “The regime does not admit the reality,” he says.

That means a complete absence of an “institutional framework” to manage money in the economy, leading to inflation rates of around 700%, according to Yoon’s estimates.

True, there is formally a central bank. But western economists who have met with officials from the Choson Central Bank describe them as meek bureaucrats who have little knowledge of even the most basic economic principles.

The result has been an increasing marginalization of the North Korean won – also nicknamed the ‘brown’ won for its brown and grubby appearance – in the economy. North Koreans resort to barter to meet their basic consumption needs – and increasingly just do transactions in hard currency, such as U.S. dollars, Chinese yuan or even Japanese yen.

Worthless Currency

The same is true of foreign investors. North Korea has a ‘foreign exchange certificate’ system – the same type used in China until 1994. Under this system, foreigners exchange dollars not for local currency but for special purple and blue currency notes.

If as a tourist you change money here, such special notes is what you’ll get. But it’s hard to find anywhere to spend them – as hard currency is demanded for most transactions.

“Basically it’s all done in U.S. dollars,” says Roger Barrett, chief representative of a Beijing-based business group that helps foreign businesses interested in investing in North Korea.

“Hard currency is the export focus, and you get your money back in hard currency,” he says.

The large South Korean projects in North Korea, such as Hyundai’s tourist cruises to Mt. Kumgang, have also been structured in U.S. dollars, according to Yoon.

Pending a major reform of the North Korean currency and pricing system, this tendency to use the dollar in any commercial transaction is likely to continue, analysts say.

In the meantime, even investors used to the most exotic instruments rule out the prospects of the North Korean won as a currency play.

“No we can’t really do anything with it,” says Jerome Booth, head of research at Ashmore Investment Management in London. “I’ve never heard of anyone trying to do anything.”

An economist who travels regularly to North Korea was even more scathing. “I don’t think this currency is worth anything anywhere,” he said.

If either project is built, then, it would probably come as foreign aid, probably in exchange for once again putting North Korea’s nuclear weapons program back under international inspection and control. After a six-month break in talks over the weapons program, American diplomats were touring Northeast Asia over the weekend trying to restart the negotiations.

Yevgeny Afanasiev, a senior Russian diplomat, said at the forum that his country “will do our utmost” to promote the two projects. “They do not have to be part of a package, they could be separate,” Mr. Afanasiev said. “But think of private investors, think of the high political risk – would you invest?”

Financing could come as part of a wider package that would gain North Korea entry into the World Bank and the Asian Development Bank. Or the money might be put up by South Korea, which would stand to benefit both directly and indirectly.

“The Russians basically believe that South Koreans will pay for it,” said Yonghun Jung, a Korean executive at the Asia Pacific Energy Research Center in Tokyo.

But many South Korean businesspeople see North Korea as an unreliable money pit.

Korea Gas, favors bringing Russian gas to South Korea through China and an underwater pipeline, bypassing North Korea and denying it any control over the supply.

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