Picture above from Marcus Noland
Marcus Noland writes at his new blog that the DPRK’s attack on Yonpyong triggered a depreciation of the North Korean Won:
A common trope among North Korea watchers is that North Korea has the asymmetric capacity to inflict damage on South Korea. By raising tensions, North Korea can disrupt South Korea’s financial and foreign exchange markets and even deter foreign investment. North Korea, by contrast, is immune from the consequences of such actions because of its authoritarian system and closed economy,
While this argument has some intuitive plausibility, past nuclear and missile tests do not appear to have generated long-lasting effects. In the recent case of the Yeonpyeong shelling, however, the North Korean provocation appears to have boomeranged, tanking the North, not the South, Korean market.
The episode points to a basic problem confronting the North Korean economy: the high level of financial repression (and economic repression more broadly) contributes to thin, underdeveloped markets that are more prone to panics and wild swings in prices. The disastrous currency reform has already primed market participants to be wary of the domestic currency, and macroeconomic instability in its wake has not helped either. The North Korean leadership may not be swayed by such considerations but we are doubtful that the leadership can be entirely sanguine either: exchange rate movements of this magnitude have implications across a range of markets, including the cost of imported food, and thus affect core supporters as well as the general population. North Korea’s provocations appear to be doing more damage to its own economy than to South Korea’s, no doubt one reason for the current push from Pyongyang to re-engage.
The data Noland lays out here paints an compelling picture. It would be interesting to think about the chain of causality in this model so we can be certain that the relationship between the won’s depreciation and the shelling of Yonyong is not merely coincidental. Theories anyone?
There is a paper in here for an ambitious researcher. I would like to know more about the DPRK’s domestic monetary policy; how the currency black market works in relationship with official fiscal and monetary policy; movements in the domestic price level; and the effects of the won’s depreciation on food imports (-?) and total exports (+?).
