Dollarization of NK Economy

Korea Times:
Andrei Lankov

For a Stalinist country, North Korea was unique in its permissive approach to hard currency transactions. Most Communist states followed the Soviet example and strictly forbade all private trading in currency. There were foreign currency shops in the Soviet Union, but only the lucky holders of foreign passports could go there.

Until the late 1980s, all Soviet citizens returning from overseas were required to submit their currency to the state-run banks within 72 hours of crossing the border. In exchange, they were given special coupons that could be used as money in special shops stuffed with quality goods. They couldn’t be used in “real” currency shops, which targeted foreigners and where the merchandise was even better. By keeping more than just a few one-dollar bills at home, a Soviet citizen committed a crime.

Professional foreign currency speculators existed, but their business was extremely risky.

According to Soviet law, they could face the death penalty for their activities, and some of them were actually shot in otherwise liberal 1960s. Thus, everybody who wanted to buy or sell currency had to be very careful.

But this was not the case in North Korea. From the late 1970s currency shops operated freely in Pyongyang and other major cities, open to any North Korean who had dollars or yen.

No questions were asked by the guards. Unlike their Soviet counterparts, the shops sold not only durables, but also daily necessities and food stuffs. Currency exchange outside the banks was illegal, but it was considered a relatively minor crime.

This approach, unusually permissive for a very repressive and restrictive regime, reflected one North Korean peculiarity.

The presence of some 95,000 ethnic Koreans who were lured into moving to the North from Japan during the 1990s. The government discovered that these people could attract remittances from Japan, so a network of the state-run currency shops emerged to suck the yen into the state’s coffers.

Prices in the shops were roughly twice the international average, with the difference going to the state.

But in the early 1990s another type of dollar-based economy emerged. From 1990 the value of the North Korean won was in steady decline. The public distribution system was falling apart, and many people turned to foreign currency as the major means of protecting their savings from both inflation and the ever present danger of a confiscatory money reform. Thus, in the early 1990s a dollar-based economy emerged.

The exchange rate began to climb. The official rate was 2.2 won per dollar. Like most other Communist states, North Korea grossly overvalued its currency to squeeze more money from foreign visitors. But nobody was trading the won at such grotesquely high rate. By the time the great famine struck the country in the late 1990s, the actual exchange rate was approximately 220 won, a hundred times the official average.

Market traders and emerging entrepreneurs of all kinds ceased to use the North Korean won for any large-scale transactions.

The dollar also became the major medium of saving. Due to the lack of data and peculiarities of the Communist economy, it is difficult to give precise figures, but the annual inflation rate over the last few years has exceeded 100 percent.

The major turning point was reached in 2002, when the government introduced economic reforms. Actually, they were formally known as “special measures.”

The word “reform” had to be avoided in the official parlance since it hinted that something in the North Korean perfect society needed adjustment, and that could not possibly be true.

The new official rate of exchange was 165 won per dollar.

This was already well below the true market rate but still constituted an overnight 7,500 percent depreciation of the national currency. This is probably not a world record, but it’s still an impressive figure.

Simultaneously, the government raised prices in state shops and won-denominated salaries. This was done in an uneven fashion. Some groups gained far more than others, with the military security personnel and academic staff being the most prominent winners.

This meant the release of huge amount of cash, which flooded the economy and sped up inflation. In 2005 the exchange rate soon approached the level of 2200 won to 2300 won per dollar.

It has been discussed whether such hyper-inflation was provoked deliberately, as a result of some calculations, or came about through planners’ mistakes. I am inclined to believe the second option.

North Korean officials are exceptionally naive when it comes to the basics of the market economy. I would not be surprised if we eventually learn that in 2002 they hoped that the prices would stand still once they had been increased to market levels.

All this is often described as the dollarization of North Korean economy. However, in late 2002 the North Koreans declared that they would switch to euros as the major currency unit in their dealings with the outside world. Since then, all North Korean shops exhibit prices in euros, not dollars.

However, this act did not change actual habits much. Transactions are still usually based on the good old greenback.

Those groups who had access to the currency tended to fare much better than others. Some of those groups were once underprivileged, and the great nationwide disaster of the 1990s actually improved their social standing.


Comments are closed.