North Korean Economy Watch

According to the Daily NK:

A report by aid organization Good Friends stating that widespread starvation is happening again in North Korea has been vehemently denied by inside sources.

In the June report, Good Friends, citing its own sources, asserted that the Chosun Workers’ Party had dispatched an investigation team to each area of the country following the June 7th Supreme People’s Assembly meeting, and that the teams had found up to two hundred people dead in each district of South Hamkyong Province.

According to Good Friends, “The first report from South Hamkyong reached the central party on June 18th, saying that for the four months from March to June in Hamheung, Heungnam and Sinpo, 100 or so people had died of starvation.”

However, a Daily NK source from Hoiryeong who recently visited Chongjin in North Hamkyong Province was incredulous when informed of the report, saying, “Who told you that? I have heard nothing about so many people dying of starvation in either Hoiryeong or Chongjin.”

Another source from Yangkang Province who said he visits Heochon County in South Hamkyong regularly said, “Although it is hard to live in South Hamkyong, people who made it through the ‘March of Tribulation’ know very well how to survive. There are newly harvested potatoes, and if you are really struggling then you can always eat herbs.”

NK Intellectuals Society (NKIS), a leading defector organization, agrees that the report is false, saying, “We have checked the report of widespread starvation in South Hamkyong with a resident of Danchon, and he has confirmed that no such thing has happened. Some elderly people with immune systems weakened by spring food shortages have died of disease, but that number is not more than ten or twenty in Danchon.”

Good Friends has tended to warn of impending mass starvation almost every year, but inside informants and the South Korean authorities often assert otherwise.

In a separate report, Good Friends also recently claimed that there was to be no more public distribution as of late last month, and that market transactions had been fully liberalized to allow the people to look after themselves.

The so-called “May 26th Measure”, Rev. Bomryun of Good Friends said at the time, was “reluctantly done as a result of a lack of the anticipated food aid from China after Kim Jong Il’s visit,” and claimed, “This time, the starvation cannot be dealt with over a short period of time, and might result in a larger number of deaths like in the mid-1990s.”

However, the actual existence of the May 26th Measure has not been proven, and markets in Sinuiju, Pyongyang, Hyesan and other main cities remain open from 10 AM to 6 PM as normal.

Won Sae Hoon, South Korea’s National Intelligence Service chief, also testified before the National Assembly’s Intelligence Committee last Thursday that North Korea probably has enough food overall to survive, saying, “This year, North Korea seems to have more than 4.3 million tons of grain, including its own production and imports, and food supply difficulties can be managed.”

Read the full story here:
Starvation Report Rejected by Sources
Daily NK
Shin Joo Hyun
7/2/2010

According to the Daily NK:

The gap between the rich and poor in North Korea is growing as the number of people trying to sell their family home to buy food expands in the aftermath of last November’s currency reforms, according to a source from inside the country.

The source from South Pyongan Province told The Daily NK on Thursday, “An increasing number of homes are being sold to buy food, and now it seems like about two out of every ten people around here have lost their home.”

According to the source, the rich buy up the houses, demolish them and build new ones to sell for a profit. Those who have amassed dollars or Chinese Yuan from trading are now turning to the housing market.

Even in Pyongyang, where the public distribution system continues to function, there are homeless people on the street, according to the source, who added, “When I was in Pyongyang, there were homeless people sleeping in the subway in large numbers.”

The source went on, “People’s lives are very difficult. There are even some who rely on digging up 5kg of wormwood, walking three hours to sell it, and only getting 100 won per kg.”

Currently, 1kg of rice sells for 400 to 500 won in Pyongyang, and 500 to 600 won in other areas.

The source also explained, “While public distribution still functions in Pyongyang, there are strict restrictions on movement, and even with our salaries we can’t buy food because there is too little.”

Since the economy is so bad, the crime rate is also going up, he added, “There are now more and more pick pocketing cases, and these days, they not only use small knives to steal purses, but even tweezers to pick stuff from pockets.”

The source’s assertion that there was public distribution until mid-June contradicts the claim of one NGO, which said that on May 26 the authorities ordered each area to look out for its own food supply. The source, when asked about the decree, said he was unaware of its existence.

Read the full story here:
Life Even Tough in Pyongyang
Daily NK
Kim So Yeol
7/2/2010

Bradley Martin, author of Under the Loving Care of the Fatherly Leader, writes in the Global Post:

Now that food shortages reportedly have forced North Korea to reverse its crackdown on capitalist-style markets, more systematic reforms for its collapsed economy may not be far behind.

The markets policy reversal came May 26 in directives issued by the cabinet and the ruling Workers’ Party to subordinate organizations, according to a report by the Seoul-based newsletter North Korea Today, which gets its information from officials and ordinary citizens inside the North. “The government cannot take any immediate measures” to relieve a food shortage that is “worse than expected,” the newsletter quoted one of the directives as saying in explanation for the policy change.

The same authorities only late last year decreed a sudden currency revaluation that crippled the “anti-socialist” markets, where stallholders had been trading for individual profit, by confiscating the traders’ wealth. The new decrees bless and deregulate what’s left of the markets, which have shrunk and in some cases closed completely in the interim, in the hope that market trading will keep people from starving. And the directives instruct managers of state-run enterprises to pursue lucrative deals — especially in foreign trade — that could help feed their employees.

This could all turn out to be the big event that finally pushes the very reluctant leadership into a multi-year campaign of serious reforms of the sort that began decades ago in Vietnam and China, according to Felix Abt, a Swiss involved in North Korean joint ventures in pharmaceutical manufacturing and computer software.

“Given an industrial stock and an infrastructure beyond repair, and the impossible task of maintaining a huge army, economic reforms appear unavoidable in the very near future,” Abt, a former president of Pyongyang’s European Business Association, wrote in an email exchange.

“It looks intriguing and it reminds me of Vietnam’s history of reforms,” said Abt, who did business for years in Vietnam before going to Pyongyang and recently has moved back to Vietnam while maintaining his involvement in North Korea.

“The Vietnamese economic situation looked dire at the beginning of the 1980s,” he explained. “Nguyen Van Linh, party secretary in Ho Chi Minh City, favored moderate economic reforms. He tried too early, lost his job and left the political bureau in 1982.

“Le Duan, secretary general of the Communist Party, was categorically against any economic reforms. He died in 1986, the year of the five-year party congress which brought Nguyen Van Linh back and elected him as his successor. The new party secretary general immediately launched the Doi Moi policy — ‘reforms.’”

Abt ventured the lesson that triggering reforms “takes something big like the death of a leading politician” in Vietnam — or, in North Korea, a “ruinous” currency revaluation.

Not every foreigner who has had firsthand economic dealings with North Korea is convinced the recent events constitute that trigger. Some worry that U.S.-led sanctions could nip any flowering of capitalism in the bud.

“The problem is still U.S. Treasury’s attitude,” said one such foreigner, who asked not to be identified further. Treasury Department officials began working several years ago to take North Korea “out of the international banking system,” discouraging trade, he noted.

Some U.S.-sponsored sanctions subsequently were eased in an effort to persuade Kim Jong Il to negotiate away his nuclear weapons capability, but after those talks went nowhere — and especially after North Korea allegedly torpedoed a South Korean warship earlier this year — enthusiasm for compromise cooled. Recent reports say Washington is moving toward aggressively strangling cash flow into the country.

There is also the argument that Kim believes he cannot afford to reform the economy because it would let in information and influences that would undermine his family’s rule by letting his isolated subjects learn that the rival South Korean system works much better.

According to Abt, one answer to both concerns could be China, which “will provide all the support necessary to the DPRK party and government to enable economic reforms without regime change.” He used the abbreviation of Democratic People’s Republic of Korea, the country’s official name. “The DPRK may expect support from other quarters, for example, the European Union, too,” he said.

“I think the dilemma of the leadership — economic upsurge versus the inflow of ‘subversive’ system-destabilizing information and ideas, particularly regarding the South — can be overcome with the necessary Chinese support,” Abt said. “Though the division of Korea can only be compared with that of Germany before 1990, China’s division — capitalist Hong Kong, capitalist Taiwan — was a sort of challenge to Deng Xiaoping and successors, too, but they learnt to manage that quite well.”

Read the full the story here:
Analysis: Kim Jong Il, the reformer?
Global Post
Bradley Martin
6/24/2010

According to Radio Free Asia:

North Koreans who can afford to save their money are ignoring a new currency brought in by the ruling Workers’ Party in the isolated Stalinist state in favor of the more trusted renminbi yuan from China.

“Our [North Korean] money is now called ‘the commoners’ currency,’ used only as a means of exchange when goods are purchased, but not as a means of saving,” a resident of Chungjin city in the northern province of Hamgyeong said.

“North Koreans [still] hold their savings in Chinese money,” the resident said.

On the country’s black markets—the chief source of essential goods for many under a planned economy in which products are scarce and often monopolized by the country’s elite—any buyer offering to pay in yuan can expect a large discount, residents say.

“Nowadays even children look for Chinese money, knowing that a hefty discount may be available if Chinese money is used in an exchange,” another source said, speaking during a visit to relatives in the northeastern Chinese city of Dandong, which borders North Korea.

The renminbi—known in North Korea simply as “B”—is strongly preferred to the local currency, as it can buy anything, the second source added.

Purported crackdown

North Korean authorities including the state security department claim to be cracking down on the use of the yuan for transactions, he said.

“But because high-ranking officials are the first to hold their savings in Chinese money, the implementation of such crackdowns is half-hearted at best, and mostly ineffective,” the source said.

“North Korean officials won’t even touch the domestic currency.”

Other sources said they fully expect the North Korean currency to collapse once enough yuan are in circulation to fuel the country’s black markets.

“It is obvious that the North Korean currency will collapse once more money enters circulation,” a third North Korean said.

That source, who like the others spoke on condition of anonymity, said the apparent stability in the North Korean currency is an illusion caused by the fact that not enough money is in circulation for it to devalue domestically.

The tight money supply partly results from nonpayment of salaries by the government, the country’s only official employer.

“In Sinuiju, only 25 percent of the people have received their salaries,” the third source said.

“Workers and those employed at manufacturing facilities received the appropriate pay only during the month after the currency reform was implemented, and then started missing paychecks,” the third source said.

Devaluation crisis

The South Korea-based Web site “Daily NK,” which publishes North Korean news, said North Koreans who use domestic currency, rather than Chinese yuan or U.S. dollars, have to pay about 10 percent more for their purchases in open markets.

North Korea issued its revalued won last December, dropping two zeroes off the old won.

At the time, the North Korean central bank put strict limits on the amount of old money that could be exchanged for the new won.

At the old rate, U.S. $1 was equal to 135 North Korean won.

The move sent shockwaves through North Korea, with reports of citizens rushing to black-market moneychangers to cash in their won for more stable U.S. dollars and Chinese yuan.

North Korean citizens were threatened with “merciless punishment” for defiance of the new currency rules and were told they had only a week to exchange a maximum of 100,000 won (U.S. $690 at the official rate, but less than U.S. $40 according to black market rates) per person of the old currency for new bills.

NGOs in Seoul reported that in response to widespread anger, those limits were raised to 150,000 won in cash and 500,000 won in bank notes.

A leading expert on the North Korean economy has said that the economic system is split between the concerns and needs of ordinary North Koreans and the country’s political elite, which runs a “royal palace economy.”

Kim Kwang Jin, visiting researcher with the U.S. Committee for Human Rights in North Korea, said the scale of Kim Jong Il’s “royal palace economy” is in the hundreds of millions of dollars a year, while the much less significant “people’s economy” doesn’t exceed a few million dollars a year.

Read the full story here:
North Koreans Shun New Won
Radio Free Asia
Sung Hwi Moon
6/23/2010

According to the Washington Post:

Because North Korea operates in secrecy and isolation, outside observers rely on informants and accounts from defectors. In this case, experts agree that the food shortage is dire. Several analysts who monitor and travel to North Korea agree that in recent weeks, Pyongyang has abandoned almost all rules about who can spend money and when. That would seem to indicate that Kim — who once equated free-market trading with “egotism” and a collapse of social order — now wants to rehabilitate markets that were damaged months earlier.

As of May 26, the government no longer forces markets to close at 6 or 7 p.m., has dropped the rule restricting customers to women older than 40 and has lifted a ban on certain goods being sold. One city official in the city of Pyungsung informed the Good Friends humanitarian group that the living standard had “drastically decreased since the currency exchange, and the government cannot provide distribution so they have to bring the market back up.”

Read the full article here.

IFES has also reported this move.

It should be noted that both of these reports cite this Good Friends report:

Blanket Permission to Open Markets “Everyone can do business”
Authorization of public market is included at the core of the 5.26 Party directives. The North Korean authorities decided to allow everyone to have access to markets and overturned their original plan to close down the general market and exercise strong control over market. They announced that there will be no time restrictions, product control or age limitation. In reality, they allowed Democratic Women’s Union’s weekly prohibition from market operation during official work so people can work at market regardless of Democratic Women’s Union hours. Their only condition was to participate in labor mobilization. Pyungsung City, which suffered the most since last year’s decision to prohibit general market, is now allowed to open business and cancel other market regulations. A city official described the background on allowing of the market, “The living standard drastically decreased since the currency exchange and the government cannot provide distribution so they have to bring market back up.” He added, “There are increasing deaths from starvation so opening market is a reasonable resolution. Death due to starvation has gone out of control.” However, although the market doors are open wide, products are not being distributed and there is no cash flow. Market has shrunk that a businessman who used to make 3,000 won a day is barely making 200-300 won a day.

Good Friends is a valuable source of information but their reports should be taken with a grain of salt.

Institute for Far Eastern Studies (IFES)
NK Brief No. 10-06-17-1
6/17/2010
 
As North Korea’s food shortages worsen and reports of starvation continue to grow, the Workers’ Party of Korea have acknowledged the failure of the central food ration program. Since the end of May, the Party has permitted the operation of 24-hour markets, and the regime has ordered the people of the North to provide for themselves.

The human rights organization Good Friends reported this move on June 14. According to Good Friends, the Workers’ Party organization and guidance bureau handed down an order on May 26 titled ‘Relating to Korea’s Current Food Situation’ that allowed markets to stay open and ordered North Koreans to purchase their own food. This order, recognizing that the food shortages in the North have continued to worsen over the last six months, since the failed attempts at currency reform, acknowledged the difficulty of providing government food rations. It calls on those who were receiving rations to now feed themselves, while also calling on the Party, Cabinet, security forces and other relevant government agencies to come up with necessary countermeasures. Now, authorities officially allow the 24-hour operation of markets, something that most had already tacitly permitted, and encourage individuals, even those not working in trading companies, to actively import goods from China.

It has been reported that government food rations to all regions and all classes of society, even to those in Pyongyang, were suspended in April. The last distribution of food was a 20-day supply provided to each North Korean on April 15, the anniversary of the birth of Kim Il Sung. Because of the difficulty of travelling to markets, the suspension of rations caused many in farming communities to starve to death. When Kim Jong Il’s recent visit to China failed to secure expected food aid, the Workers’ Party had no choice but to hand down the ‘May 26 Party Decree’. While the suspension of rations has considerably extended the economic independence of North Korean people, the regime has significantly stepped up other forms of control over society. Public security officers have begun confiscating knives, saws and other potential weapons over 9 centimeters long in an effort to stem murder and other violent crimes. Additionally, state security officials are cracking down on forcefully resettling some residents of the age most likely to defect, while sending to prison those thought to have contacted relatives in South Korea.

According to Daily NK, North Korean security officials are pushing trading companies to continue trading with China, while calling on Chinese businesses to provide food aid. It also appears that North Korean customs inspections along the Tumen River have been considerably eased, and there is no real attempt to identify the origin or intended use of food imported from China. Sinheung Trading Company has asked Chinese partners investing in the North to send flour, corn and other foodstuffs. The Sinheung Trading Company is operated by the Ministry of State Security, and is responsible for earning the ministry foreign capital. It appears that food acquisition is now a matter of national security, as North Korea is expecting South Korea and the rest of the international community to economically isolate the country.

According to the AFP:

North Korea has completely cut off state food rations after China failed to supply the impoverished communist country with extra cereals, a welfare group said Monday.

The ruling communist party announced in a directive on May 26 that there would be no state rations for a while, said South Korea’s Good Friends group which has contacts in the North.

People were authorised to buy food supplies through private markets, it said, adding the directive was due to delayed shipments of food from China.

“The directive was unavoidable” because China failed to send the aid which had been anticipated after leader Kim Jong-Il’s trip to Beijing in early May, group president Pomnyun, who uses just one name, told reporters.

Private markets are now open around the clock across the North, he said.

The North suffered famine in the mid-1990s which killed hundreds of thousands and it still grapples with severe food shortages. The UN children’s fund estimates one third of children are stunted by malnutrition.

The state food distribution system collapsed during the famine. Free markets sprang up and were condoned for a time.

Since 2005 the regime has been reasserting its grip on the economy, with controls or outright bans on the private markets.

A currency revaluation last November, designed to flush out entrepreneurs’ savings, backfired disastrously, fuelling food shortages as market trading dried up and sparking rare outbreaks of unrest.

The North was forced to suspend its campaign to curb the private markets.

Read the full story here:
N.Korea completely cuts off state rations: aid group
AFP
6/14/2010

The New York Times published a lengthy article on the DPRK’s currency reform effort launched last year.  Excerpts below:

Like many North Koreans, the construction worker lived in penury. His state employer had not paid him for so long that he had forgotten his salary. Indeed, he paid his boss to be listed as a dummy worker so that he could leave his work site. Then he and his wife could scrape out a living selling small bags of detergent on the black market.

It hardly seemed that life could get worse. And then, one Saturday afternoon last November, his sister burst into his apartment in Chongjin with shocking news: the North Korean government had decided to drastically devalue the nation’s currency. The family’s life savings, about $1,560, had been reduced to about $30.

Last month the construction worker sat in a safe house in this bustling northern Chinese city, lamenting years of useless sacrifice. Vegetables for his parents, his wife’s asthma medicine, the navy track suit his 15-year-old daughter craved — all were forsworn on the theory that, even in North Korea, the future was worth saving for.

“Ai!” he exclaimed, cursing between sobs. “How we worked to save that money! Thinking about it makes me go crazy.”

North Koreans are used to struggle and heartbreak. But the Nov. 30 currency devaluation, apparently an attempt to prop up a foundering state-run economy, was for some the worst disaster since a famine that killed hundreds of thousands in the mid-1990s.

(more…)

According to the Daily NK:

Today, the North Korean markets seem to have returned to the days before the currency redenomination. The price of rice appears to be rather stable, especially when compared with that of February or March. Especially, following Kim Jong Il’s trip to China, rumors indicating that food would be imported began to circulate, and this has made declining prices even more marked.

According to inside sources, the price of rice in Hoiryeong, North Hamkyung Province is now 480 won per kilo (June 4th), 420 won in Sinuiju (June 7th), 360 won in Sunam-district of Pyongyang (June 2nd), and 380 won in Sariwon (June 7th). The price of corn is approximately 50% that of rice, although recently in Hwanghae Province, households using corn as feed for pigs drove an unusual situation where the corn price reached almost 70% that of rice.

The exact nature of Chinese support for North Korea cannot be confirmed officially, however, the North Korean regime’s encouraging foreign currency earning enterprises to import food from China since March seems to have contributed to rice price stabilization.

One inside source added that the “reactivation of food smuggling on the border between North Korea and China” has also helped.

However, the main overall reason for the failure of the initial prediction, “When the farm hardship period comes in May and June, food prices will skyrocket” appears to have been the normalization of the market.

The source commented, “Compared with the situation prior to the currency redenomination, trading in industrial goods has decreased slightly, however, it is close to its previous condition. Since buyers and sellers can access that market any time, price volatility is not that great anymore.”

That being said, the opening hours of the market have been reduced since the authorities handed down a “rice planting battle order” in early May which stated, “Everyone must participate in the rice planting battle. The market should only be used for the purchase of food, side dishes and those necessities required for the day.”

The source explained, “Markets everywhere now open between 2 and 4 P.M. and close at sunset,” adding that there are small differences depending on the particular market. In North Hamkyung Province, the market normally closes at sunset; however, markets in Hwanghae Province and Pyongan Province, which are under heavier pressure due to the rice planting, close earlier, at around 6 P.M.

But concerns about food will not be solved even if the price of rice remains stable. Merchants are still watching prices with a concerned look since rumors constantly assert that food prices will increase again in July. The North Hamkyung Provincial Party Committee held a cadres meeting last May in which it released news that food distribution for the months from July to October must be prepared by each unit individually, meaning that the central authorities have no plans to assist.

The agricultural situation is one concern. North Korea has been suffering from a severe fertilizer crisis since the beginning of spring farm preparations. After Kim Jong Il’s visit to China, Chinese fertilizer was imported which temporarily alleviated the situation, but the rumor is that fertilizer for the summer has yet to arrive.

Recently, Kim Jong Il visited a domestic fertilizer production facility, Namheung Youth Chemical Works in Anju City, South Pyongan Province. There, he complimented factory management, saying, “It is a relief to know that fertilizer is being produced in Namheung.” The incident displays North Korea’s concerns about fertilizer.

Other factors which destabilize food prices are the icy inter-Korean relationship and international community sanctions.

Recently, around the North Korean market, the number of street vendors, so-called ‘grasshoppers’ has greatly increased. One source explained, “This situation has been caused by the middle class being demoted to the lower classes due to the big damage they incurred during the currency redenomination.”

Sharply decreasing trade in higher priced goods like home appliances and furniture is derived from the same source.

The tumbling credibility of the North Korean currency is another ongoing worry, as is a lack of small denomination bills. One source explained, “If you purchase a 30,000 won jumper from Sungyo Market in Pyongyang, the cost is $30 (market exchange rate, the equivalent of 27,000 won on the day), but it is 30,000 won if you pay in North Korean currency.” That’s a ten percent mark-up for people using local currency, the material representation of a lack of trust in the won.

In areas of Pyongyang, Wonsan, Sariwon, and Haeju, dollars and then Euros are preferred over won, but in Jagang Province, Yangkang Province, and North Hamkyung Province, Yuan are preferable to dollars. Places where all four; U.S. dollars, Yuan, Euros and won are being used are Sinujiu and the port city of Nampo on the west coast. One source explained that due to this situation, high-priced products like televisions, DVD players and refrigerators are being sold only for U.S. dollars or Yuan.

Also, he added, “There is a shortage of small bills which is causing some inconveniences in market trading.”

At the time of the currency redenomination, North Korea displayed 7 kinds of small bills and coins; 1 chon, 5 chon, 10 chon, 50 chon, 1 won, 5 won, and 10 won. The source explained that demand for the ‘chon’ unit coins is practically non-existent; the problem is that 1 won, 5 won, and 10 won are frequently used in market trading but a shortage of bills is causing inconvenience. Merchants are setting the price of goods mostly in increments of 10 won and 50 won as a result.

Read the full story here:
Everything Is Stable, But for How Long?
Daily NK
Park In-ho
6-9-2010

Nautilus Institute Policy Forum
Policy Forum Online 10-027A
5/12/2010

Alexander Mansourov

North Korea is not static and inflexible. Indeed, there tends to be a very dynamic picture once you look below the surface. Change is a constant but, as in almost any state or society, it brings about tension. However, there is little or no sign that current tensions, caused by changes in the distribution of power within the leaderships’ core cadre, positioning for succession, or economic reforms are eroding the overall strength of the regime. While such tensions may spill over into society, there have been no signs that they have risen to a level that significantly weakens the regime or have made it feel that drastic action is needed.

Contrary to the popular view, North Korea is not being torn apart by an epic battle between the state and markets. The two have over time established an uneasy but symbiotic relationship. The state still considers the markets as parasites and vice versa, but each has learned to exist with the other. The popular argument that the reopening of markets in the North after their alleged (but unverified) closure is a sign of government capitulation before their power is not persuasive.

Much of the “evidence” we have for the latest uptick in internal tensions following the currency redenomination consists of recycled stories from unproven or unreliable sources relating anecdotes from small slices of the country. These publicly available sources for North Korea are very subjective and come through the lens of defector groups and humanitarian non-governmental organizations that, quite frankly, have their own agendas. Corroborating these reports is often impossible. Separating speculation from rumor and fact is difficult. The best we can do is to strip back some of the speculative veneer and establish hypotheses we can test over time.

What is Really Happening?

In spite of recent speculation in the New York Times and other Western media about North Korea’s growing economic desperation and political instability, Pyongyang is, in fact, on a path of economic stabilization. Last year’s harvest was relatively good-the second in a row-thanks to a raft of developments including favorable weather conditions, no pest infestations, increased fertilizer imports from China, double-cropping, and the refurbishment of the obsolete irrigation system. Thanks to the commissioning of several large-scale hydro-power plants which supply electricity to major urban residential areas and industrial zones, North Korea generated more electricity in 2009 than the year before, although losses in the transmission system remain significant.

According to China’s Xinhua news agency, industrial production in North Korea grew by almost 11 percent last year and 16 percent in the first quarter of 2010, compared to the first quarter of 2009. That positive development was facilitated by two nationwide labor mobilization campaigns-the “150-day campaign” and “100-day campaign” as well as growth in extractive industries, construction, a revival of heavy industries, modernization of the consumer-oriented industries and the expansion of the high-tech sector, especially, information and biotechnology.

Despite a decline in inter-Korean commerce and international sanctions imposed after the North’s missile and nuclear tests in early 2009, foreign trade did not contract in any meaningful way thanks to burgeoning ties with China. Moreover, Beijing seems to be committed to dramatically expanding its direct investments in the development of the North’s infrastructure, manufacturing, and service sectors.

There is no question that, for ideological, political, and national security reasons, North Korea’s macroeconomic policy has always been oriented towards the needs of domestic producers. The requirements of large-scale munitions and heavy industries have been the top priority, an orientation that has handicapped the development of domestic consumer-oriented industries. Since the collapse of the government-run, public food distribution system in the 1990s, Pyongyang has largely neglected the interests of individual consumers. It has allowed inflation to eat away at their disposable income, leaving them with only a few possible coping strategies. Those strategies have included pilferage of state assets, official corruption and participation in emerging retail markets where quasi-private merchants have been trading mostly in domestic agricultural produce and Chinese manufactured goods.

As the state-owned economic sector began to recover in the past two years, it had to confront labor shortages, rising production costs, and a powerful competitor-China. Whereas the extractive industries (especially coal and ore mining) benefitted from skyrocketing global raw materials prices as well as proximity and access to the ever-hungry Chinese market, the manufacturing industries hit the “Great Chinese Wall” of cheap consumer goods and industrial products that flooded the country. The competition was killing North Korea’s domestic manufacturers, who had barely begun to recover from two decades of depression.

At the same time, the North’s consumers-always conscious of rampant inflation-dodged mandatory savings requirements and began to increase consumption. They started to develop a clear preference for spending their meager disposable incomes on foreign-made goods in the newly emerging farmers’ and general industrial markets rather than in state-owned stores. Insensitive to the plight of the domestic industries, consumers voted with their purses for better quality, albeit more expensive, imports.

In addition, this development helped drain liquidity from the state banking system. Since the post-July 2002 economic reforms, salaries and money earned by private merchants were rarely deposited in bank accounts and returned to regular state banking channels. Instead, they circulated in emerging markets, were stored in kimchi jars, buried underground, or exchanged for renminbi or euros and taken out of the country by foreign (mostly Chinese) traders. Despite the Central Bank’s proclivity to print more money to increase the supply needed for state investment (which in turn fueled inflation), industrial producers were confronted with increasing difficulty in procuring investment funds from the state banking system, which was running short on previously mandatory individual bank deposits.

Rationale for Current Macroeconomic Stabilization Measures

In formulating the current round of measures, the authorities had to figure out how to cut a political, economic and social Gordian knot. Their options were restricted by an uncertain leadership agenda, ideological confines, political biases, lack of extensive macroeconomic stabilization experience, and scarce resources.

First, they had to reconcile the interests of domestic producers, very well represented by senior managers of state-owned enterprises at all levels of state power, otherwise known as the red directorate, who pressed the government to lower their rising production costs and to protect them from foreign (Chinese) competition. At the same time, consumers, asserting themselves through the nationwide structures of people’s committees and public organizations, sought higher salaries and alternative employment in the non-state sector, with a preference to consume higher quality imports.

Second, they had to reconcile the interests of state bankers-who were urging modernization and re-capitalization of the state banking system in the throes of an unprecedented credit squeeze-with those of the general population worried about inflation, mistrustful of the system, and reluctant to keep their savings in banks.

Third, they needed to find a way to repay the people’s life bond funds “borrowed” from the population in 2003 while also mobilizing additional funds for future capital investment even through confiscatory measures.

Fourth, they probably wanted to restore public confidence in the national currency and must have been motivated by a desire to combat inflationary expectations as well as to signal that inflationary days were over.

Fifth, they probably wanted to curb the growing influence of the new moneyed class demanding fewer restrictions on its businesses and foreign exchange transactions, while placating the regime loyalists, who still believed official propaganda and defended the advantages of the socialist economic system.

Sixth, they wanted to restore the credibility of the state-centered economic management system as demanded by the anti-market neo-conservatives from the party establishment. At the same time, policy-makers wanted to restrain the ever-present bureaucratic class seeking to control, license, and regulate anything and everything, which gave rise to rampant official corruption.

Finally, they wanted to re-assert monetary sovereignty since growing foreign currency substitution was undermining the central bank’s control over the money supply. The loss of monetary sovereignty would have become an insurmountable practical obstacle to building a “strong and powerful state” by 2012, North Korea’s publicly stated objective, and could not be tolerated politically, especially during a leadership transition period.

In an interview with Kyodo News on April 18, 2009, Ri Ki Song, economics professor at the Economic Institute of the Academy of Social Sciences, a North Korean government think tank, pointed out that “redenomination was intended to curb inflation, enhance currency values and create a favorable environment for economic management, and it was also aimed at stabilization and improvement of the people’s livelihood by supplying goods through a systematic national distribution system.”

Outlines of the New “Package Deal”

The currency redenomination began to unfold in late 2009. In November, the Supreme People’s Assembly (SPA) Presidium issued a decree “On Issuing New Currency.” At the same time, the Cabinet of Ministers promulgated two decisions entitled “On Stabilizing People’s Livelihood” and “On Establishing Proper Order in Economic Management System.” These were quickly followed by a series of new regulations issued by the Central Bank, Ministries of Finance and Commerce, Price Regulation Bureau, General Bureau of Customs, and other government agencies.

The purpose of these initial steps appears to have been two-fold. First, the North wanted to reinvigorate domestic production of consumer goods. That would be done through import substitution as well as rebuilding the purchasing power and stabilizing the living standards of the mass of budgetary employees. The livelihood of these people-who constitute the overwhelming majority of the workforce, are employed at institutions such as state-owned industries, hospitals and schools and are paid out of the state budget-had been gradually eroded by marketization and high inflation. Second, the reform was designed to encourage savings as well as induce cash flow from proliferating black markets to the state banking system, which had been rapidly losing its handle on money in circulation.

While this move has been portrayed in much of the Western media as a “failure” that has caused significant tensions inside the North, in fact, it is too early to declare these measures either a failure or success. Such redenominations are almost always a source of tension when they are carried out in any country and often need to be adjusted or implemented again before achieving the intended results. North Korean economist Ri Ki Song admitted that “Price adjustments and other related measures were not implemented quickly enough, and there was a situation where [North Korea] could not open the market for several days.” But he took issue with “some Western reports that did not reflect what actually happened.” Ri noted that “In the early days immediately after the currency change, market prices were not fixed, so markets were closed for some days, but now all markets are open, and people are buying daily necessities in the markets.”[1] If inflation is eventually tamed and the currency exchange rate stabilized in the long run-the verdict is still out on both accounts-then these measures may eventually be viewed as a partial success.

As always, there were winners and losers but, once again, the reality appears to be somewhat less clear-cut than has been assumed by the Western media, economists and other analysts. In view of the ongoing preparations for the leadership succession, the redenomination could be viewed as a populist measure aimed at inflicting pain on less than 10 percent of the population through wealth redistribution in order to win support from more than 90 percent of the population who still live on state salaries and have not seen any improvement in their life despite burgeoning market activities. North Korea is still fundamentally a socialist society, and Kim Jong Il’s regime probably won some measure of support from the vast majority of North Koreans for its crackdown on corruption and abuses by rich traders and corrupt government officials who benefitted the most from bustling activity in black markets.

Private merchants may have felt some pain (although likely had stored their wealth in goods, commodities or foreign exchange rather than the old North Korean currency). But the heaviest losses appear to have been suffered by corrupt low and mid-ranking officials from the “power organs” (People’s Security and State Security officers as well as officials from courts and prosecutors’ offices) and government bureaucrats who wielded licensing, auditing, or controlling authority at the county and provincial levels. They had allegedly accumulated substantial savings through bribes and abuse of power and kept their ill-gotten gains in kimchi jars and under the mattresses at home. As a result, these officials could not find a way to get these stacks of old banknotes exchanged for new ones. According to a knowledgeable South Korean source, it is their money that was reported floating in sacks down the Yalu River after redenomination, not the traders’ capital. In short, the currency move may have ended up as more of a strike against corrupt officials and local elites rather than private traders. With markets re-opening and private trade resuming in late January, the latter rebounded fairly quickly, whereas it is likely to take a long time for the corrupt mid-level bureaucrats to recoup their losses through a new round of bribes and extortion.

In Ri Ki Song’s judgment, “an unstable situation occurred temporarily and partially after the currency redenomination,” but, “it did not lead to social chaos at all, and the unstable situation was quickly brought under control.”[2]

Following the currency redenomination, the next government move was to reset the official prices for commodities, such as grains, meats, and fuel, manufactured goods including textiles and daily necessities, and real estate use and utility fees to the pre-2002 level. Salaries of employees in the state sector of the economy were also adjusted, but at a much higher level. Reportedly, those who previously were paid up to 3,000 old won per a month saw an average 8 percent raise in their salaries, whereas those who used to receive a salary of more than 3,000 old won per month saw a decrease on the average of 10 percent per month. Farmers in the cooperative sector were reported to have received a one-time cash payout from 50,000 to 150,000 won in new money. These economic measures initially increased the purchasing power of most consumers in the country, especially those who depended solely on state salaries and wages for their income.

Even according to the Seoul government, the DPRK’s market prices and currency exchange rate appear to be stabilizing after predictable fluctuations from the surprise government-led currency redenomination last year. In its latest report on North Korea submitted to the National Assembly’s foreign affairs committee, the Unification Ministry said that market prices in the country were on a “downward path” following recent measures by the authorities. A kilogram of rice, which cost around 20 DPRK won immediately after the revaluation, soared to 1,000 won in mid-March but dropped to the 500-600 won range in early April, according to the ministry.

Furthermore, the North Korean government released another broadside of legislation in December and January: the Presidium of the Supreme People’s Assembly revised a number of laws pertinent to economic management ranging from those governing real estate management and commodities consumption to general equipment import, labor accounting, agricultural farms, water supply, sewage, and ship crews. These measures were aimed at bringing the existing regulatory framework in line with the new realities of an emerging market economy, where a growing number of corporate and private interests compete for access to and use of public assets. For example, the Real Estate Management Law is aimed at restructuring existing regulations for the use of public lands, especially for corporate and private purposes, and strengthening the ability of the state to collect real estate taxes and land use fees. It also stipulates the new right to grant “long-term land leases” to foreigners, which is especially important in promoting foreign investment in special economic zones such as Rason and Kaesong.

In January, the North’s Foreign Trade magazine unveiled the contours of the new tariff system established in accordance with the latest revisions in the regulations for the implementation of the DPRK Customs Law and the provisions of the Customs Law. In addition, late last year Kim Jong Il reportedly authorized the restructuring of the foreign trade management system, expanding the prerogatives of general trading companies and upgrading the status of special economic zones, in hopes of boosting domestic production of the export-oriented goods, encouraging import substitution, and attracting foreign investment in the consumer goods sector.

Also in January, the North Korean authorities revealed their intention to seek foreign investment and to reform the state banking system by establishing the second tier of quasi-commercial banks-the State Development Bank, Export-Import Bank, and State Science and Technology Fund-backed partially by the Central Bank and partially by foreign capital.

The stated goals behind this innovation in banking policy are to create favorable financial conditions for the implementation of a 10-year economic infrastructure development plan and five-year science and technology development plan, as well as to facilitate further expansion of foreign trade. The first plan envisions the implementation of six major projects-the development of food production, modernization of railways, construction of roads, expansion of ports, modernization of electric power grid, and development of the energy sector-within the next ten years, to be funded outside the regular state budget channels, primarily relying on Chinese venture capital. The five-year plan stipulates an increase in the state’s investment in science and technology as one of the pillars for a “prosperous, powerful nation,” with a focus on information technology, nano technology and bioengineering.

The notion that all of the measures announced in December 2009 and January 2010 were a hurried response to negative public reaction to problems in the currency revaluation is a little hard to accept. More likely, these were part of a longer-term development strategy of which the currency measures were only one component.

To sum up, North Korea is changing. The latest demonstration of the government’s desire to facilitate change is the new package of economic adjustment measures. Those measures seek to displace imports, restore self-reliance, and consolidate state control over the economic system at the expense of the newly emerging proto-markets in retail trade and the small private merchant class that may create political headaches for the regime down the road.

Subsequently, we may see the establishment of a new-more protectionist and statist-equilibrium in the relationship between domestic producers (industrial factories and plants), importers (trading companies), financiers (state bankers and foreign capital), and consumers (state retail industry and private markets). This might involve the government’s efforts to further control the demand, regulate the supply of imported goods through selective protectionist tariff measures, raise funds for new infrastructure and facility investment, boost the supply of domestically manufactured goods and make them more competitive and affordable.

How this will all work out remains to be seen. Whether the new equilibrium will facilitate economic growth and contribute to increasing production, trade, and consumption, or end up in economic failure causing social chaos and political instability is obviously the core question. Contrary to the rampant, often inaccurate speculation in the Western media, it’s much too soon to tell.