UPDATE 20: It might be possible that public anger over the government’s new monetary policy forced the govenrment to increase the maximum amount of currency that can be converted. According to the AFP:
North Korea has backtracked on details of its shock currency revaluation following a riot by market traders that led to 12 executions, a report said Tuesday.
South Korea’s Chosun Ilbo newspaper said the hardline communist state had taken a series of steps to placate its people over the 100-to-one revaluation announced two weeks ago.
It said the concessions follow a riot by merchants in the eastern city of Hamhung on December 5-6 which stirred public sympathy. Twelve “masterminds” of the unrest were later executed, the paper said.
It was not possible to confirm the reported riot or executions. But there have been accounts of widespread anger since the regime revalued its currency earlier this month, requiring old banknotes to be exchanged for new ones at the rate of 100 to one.
Analysts said the move was aimed at curbing inflation and clamping down on a growing free-market economy to reassert the regime’s control.
But the initial limit of 100,000 won on the total cash that each person could exchange effectively wiped out many people’s savings in the impoverished nation.
On Sunday authorities raised the limit to 500,000 won, Chosun said, quoting sources in the North.
One hundred thousand won in old money was equivalent to 30-40 dollars at the previous black market rate.
The North also announced that eventually citizens would be allowed to exchange all their old bills for new ones if they deposit the money in banks, Chosun reported.
People reportedly shun banks because they fear investigations into the source of their savings, or restrictions on withdrawals as in the past.
In response, Chosun said authorities promised no probe into savings of up to one million won and unlimited withdrawals if savings of more than one million are properly explained.
The newspaper quoted a high-level North Korean source as saying authorities “are backtracking under pressure from market forces”.
UPDATE 19: The Daily NK reports that DPRK authorities launched the monetary revaluation without establishing new wages and prices:
A source of Yangkang Provicne explained in a phone conversation with The Daily NK on the 11th, “Wages of workers used to ranged between 1,300 and 2,500 North Korean won.” “If this is put into operation, then the wages of the secretaries of the Provincial Committee of the Party would be leveled to approximately 1,000 won.”
“It was agreed that a precise measure relating to wages was not yet perfect and would be relayed to the accounting clerks at a later time,” the source adds. “Under the decree, all debt relations among existing enterprises would become ‘zero’ and foreign currency earning organizations will hereafter undergo adjustments. However, due to the fact that the size of liabilities between enterprises is not so significant, it is essentially a meaningless measure.”
Unusually, on the morning of the 9th, the lecture broke free from the customary one-sided presentation of the Party decree in favor of audience participation. Attendees stated one after another: “We must establish reasonable prices as soon as possible and stabilize the workers;” “If the food problem is not resolved, then we will not be able to prevent rising prices;” “The existing wages and [state mandated] food prices should be adhered to;” and so on.
In the end, the Yangkang meeting offered a temporary, partial settlement of enterprise wage and debt issues as well as the announcement that more follow-up measures will be introduced in the near future. Authorities also stated that “national course of action” on price-related matters will be subsequently delivered.
The only government-authorized pricing to be finalized involved railway shipping charges. A “temporary” train route table has been posted at the Youth Hyesan Station, with Hyesan-Pyongyang fare set at 46 won and Hyesan-Baegam fare at 18 won.
“When judging by distance, it is almost more expensive to operate intra-provincial trains,” the source observes. “Fixing the Hyesan-Pyongyang cost at 46 won was based on the temporary trains that ran when university students in Pyongyang would return to their hometowns during the early break. There is no other meaning.”
But the fact that other price measures were not announced at the cadres meeting helped maintain a sense of confusion among North Korean citizens. “Nowadays, even when two or three people gather, they will mutter, ‘Where is our country headed?’” bemoans the source. “The state should decide on wages or prices, so the markets can run normally.”
“But since the authorities have been dragging their feet, ordinary citizens have not been able to regain their senses.”
UPDATE 18: According to the Choson Ilbo, the DPRK has banned the entry of foreigners for a period of time and temporarily closed markets:
One source in China said that Pyongyang would bar foreigners from entering the country temporarily at the end or beginning of a year, when customs officials along the border with China are on leave for year-end holidays, but banning them until February is “quite uncommon.”
Experts say this could herald a visit by Kim Jong-il to China, since the paranoid North Korean leader likes to ensure maximum security along the route of his special armored train. Chinese President Hu Jintao invited Kim to visit at a “convenient” time when he met Choi Tae-bok, the chairman of the North’s Supreme People’s Assembly, in October. Kim has visited China four times, and twice (in 2001 and 2006) they fell in January.
But Good Friends, a Seoul-based organization which provides aid to North Korea, in its latest newsletter said North Korean authorities shut down open-air markets for three days starting on Monday after prices of goods soared following the currency revaluation. The North was to reopen the markets after prices adjust.
One researcher with a state-run research institute said, “For North Korea to succeed in its currency reform it needs stable supplies of food and other products, and Pyongyang may have decided that China is the only country it can rely on. That might also make it necessary for Kim himself to visit China.”
More on market closures can be found in Bloomberg.
UPDATE 17: The Daily NK reports that DPRK trading offices and companies on the Chinese border were raided in advance of the currency revaluation to confiscate capital which had accumulated in these offices. The central government confiscated these resources apparently because they were under the de facto control of various nouveau riche.
UPDATE 16: According to Australian News.com:
North Korea has set new prices for staple goods after its shock currency revaluation, but most items are selling in markets for more than laid down by the regime, an aid group said overnight.
Citing informants in North Korea, South Korean group Good Friends said the new prices were published last Wednesday.
“Few items sell at the state-set prices, and most of them are trading at higher-than-set prices at the markets of major cities nationwide,” it said in a newsletter.
Rice is selling for 50 won per kilogram at markets in the northeastern port city of Chongjin, more than double the state-fixed price of 23 won, it said.
Other staples such as corn, wheat flour and beans are also selling for more than the government price, it said, adding that pork was a cheaper exception.
UPDATE 15: According to the Daily NK it seems the DPRK authorities are taking the week to educate the lower level party members on how the post-currency reform economy is supposed to function. These are the same low-level party officials who probably bore the brunt of the DPRK’s monetary “reform” initiative:
Meetings and lectures were convened on the 8th to follow-up on the currency redenomination; explaining prices, wage standards, and payments between factories and enterprises.
A source from Yangkang Province reported the news on Wednesday in a telephone conversation with the Daily NK, “A lecture began at 2 P.M. yesterday. It was administrative education for managers of sub-Party organizations, Primary Party Committee secretaries and accounting clerks in factories.”
The source added, “The meeting was scheduled for the evening of the 9th, but if necessary it may continue on the morning of the 10th.”
These kinds of meetings were also held right after the fourth denomination replacement in 1992 and again after the July 1st Economic Management Reform Measure in 2002.
This time around, there are two kinds of lectures; one for cadres, and a separate one for administrative workers.
In the Yangkang cadres lecture there were major Party cadres from the People’s Committee of Yangkang Province, the Agricultural Accounting Committee of the province, People’s Safety Agency, May 16 Construction Bureau (a temporary organization overseeing each province’s construction projects) and Hyesan Steel Mill; office workers from the financial department of the Yangkang Province People’s Committee, accounting clerks and treasurers from factories and enterprises attended the administrative lecture. The lectures were held in the conference halls of the Provincial Party Committee.
The Hyesan Party Committee also reportedly convened lectures for cadres and workers in the same way in the conference hall of the Municipal Party Committee and the Kim Il Sung Revolutionary Ideology Institute in Hyejang-dong.
In the meetings and lectures, provision of payment and modes of transaction between factories, state designated prices for commodities and services and the setting of an upper limit for market prices were all rumored to be on the agenda.
Among them, wage levels and top limits for jangmadang prices are the most noteworthy items.
On the subject of wages, rumors apparently streamed out from around the conference halls; “They will maintain wage levels as was,” and, “Wage levels will be cut in half.”
If wages are maintained, or even cut in half, the monetary value of wages would increase from 50 to 100 times, or at least they would if prices remained the same.
To this end, the North Korean authorities are also expected to announce detailed rules whereby prices in markets may not exceed state-designated levels.
The source explained, “The state’s policy is to build a world where the people can live on their wages. The reason for the decree about the markets is to prevent prices rising.”
However, economists worry about the impact of these policies. If the authorities are not able to expand supply having raised wages substantially, and then they forcefully reduce market prices, in the long run hyperinflation will result and trading will become all-but impossible.
Especially, if the authorities take to printing money in order to pay for projects related to the construction of the “strong and prosperous state,” an unimaginable aftermath will be created.
Meanwhile, the source explained, “In some regions, food prices are already soaring. Traders don’t like this phenomenon, which at least reassures the authorities about the traders’ attitudes.”
However, he pointed out that even when the market works normally, price levels are not particularly stable.
UPDATE 14: The AFP notes that the currency reform has cripped the DPRK’s markets:
Private markets on which North Koreans rely heavily for necessities have been paralysed since the communist state’s shock currency revaluation last week, a report said Wednesday.
South Korea’s Hankyoreh newspaper quoted sources in China’s border city of Dandong as saying private transactions — which supplement the faltering state distribution system — have come to a virtual halt.
“The road linking Pyongyang and Sinuiju has been shut down. It’s been hard to get through to partners in the North by phone,” a Chinese businessman told the independent daily in Dandong, across the border river from Sinuiju.
…
A North Korean central bank official has been quoted by a pro-Pyongyang newspaper as saying the aim is to weaken the role of free markets and strengthen the socialist system.
Amid reports that some frustrated residents have been torching old bills, South Korean aid group Good Friends said authorities have threatened severe punishment for such an action.
Many residents would burn worthless old bills rather than surrender them to authorities, in order to avoid arousing suspicions about how they made the money, Good Friends said.
The banknotes carry portraits of founding president Kim Il-Sung and his successor and son Kim Jong-Il. Defacing their images is treated as a felony.
UPDATE 13: Wall Street Journal offers map of public discontent.
UPDATE 12: Entrepreneurship in China: “Beijing markets offer counterfeit old N. Korean notes” (Kyodo).
UPDATE 11: Normally currency revlauations are coupled with institutional and organizational reforms to the monetary and public finance systems so that the public will have confidence that the new currency will maintain its value. This is how inflation is defeated. The DPRK has not announced any reforms of either the monetary or fiscal systems–in fact they did not even announce the currency conversion–so in addition to people losing their savings they have no expectations that the new currency will retian its value…so of course we will get instant inflation once again and probably worse than the original rate. According to Bloomberg:
The North Korean won has plummeted 96 percent against the dollar after the government revalued the currency last week, according to reports by Yonhap News Agency and a South Korean aid group.
A North Korean bank in Sinuiju, near the border with China, offered to buy dollars for 35 won on Dec. 7, Good Friends, a Seoul-based rights group, said today on its Web site. Before the currency revaluation, the official rate was about 140 won, and as much as 3,500 won in the black market, Yonhap said.
…
Following the revaluation, rice prices have more than doubled, Good Friends said. One kilogram (2.2 pounds) of rice cost 50 won as of Dec. 5, compared with 16 won to 17 won on Dec. 2, the group, which obtains information through contacts within North Korea, said in its newsletter yesterday.
One in four school children were absent due to hunger on Dec. 3, indicating how widespread the struggle to find food had become, the group said, without saying how it derived the number.
Caveat Emptor on Good Friends reports. An alternate report claimed that school was ended early to prevent the spread of H1N1.
UPDATE 10: Institute For Far Eastern Studies (IFES) (NK Brief No.09-12-4-1)
At 8:00 A.M. on December 2, North Korea began transferring to a new currency throughout the country. According to Daily NK, the order to exchange currency was issued without explanation, as each regional branch of the Korea Central Bank began exchanging notes from 8:00 in the morning. ‘Good Friends’, ‘North Korea Intellectuals Solidarity’, and other defector organizations are reporting that the North is in the process of changing its currency.
North Korean officials first notified residents of the money swap on November 30. Citizens were advised that old notes were to be traded for new money, but there was significant resistance and locals refused, leading officials to issue a new order to exchange currency. The order stipulated that the exchange be carried out at ‘100 to 1’ and that for any family exchanging more than KPW 100,000, any additional monies are to be exchanged at a rate of 1000 to 1. Any remaining currency is to be deposited in the bank, and will be re-issued in new notes at a later date.
If anyone actually has as much as a million won in cash, they would be able to transfer the first hundred thousand into one thousand won of the new currency, and the next hundred thousand would be worth a mere 100 won. The remaining 800 thousand won of savings would have to be turned over to the bank on the promise that it would be accessible at some time in the future at an exchange rate that has not yet been determined. This has been met with considerable controversy within North Korean society.
On November 3, 1992, as the North went through a currency reform, old money was exchanged for new on a 1-to-1 basis, and on a standard of 300 won-per-family. Up to 200 thousand won could be deposited as savings in a local bank, but one month later it was announced that each family could withdraw no more than four thousand won in any three-month period. At the time, when banks failed to return savings to the people, many became disheartened. Markets closed and stalls were shuttered as growing numbers of people became worried that they would be unable to exchange their money for U.S. dollars or Chinese yuan.
Currency traders in Pyongsong markets, which are at the heart of North Korea’s manufacturing distribution network, were reduced to tears. Shoppers stayed at home and business travelers suddenly stopped coming. Rice traders were selling 1 kilogram for 2,200 won at the end of last month, but are now asking as much as 30,000 won (of the old currency). This means prices jumped to almost 13 times as much as they were just three days before the currency swap announcement. Currently, all of the North’s security forces are deployed to restrain the people, and not only have the Peoples’ Security Forces and the National Security Department been put on alert, but even the military has been put on emergency status. A 10:00 P.M. curfew is being enforced, and it has been announced that violators will be dealt with strictly.
With this currency exchange, the North’s middle-class is expected to suffer considerably. This is because the poorest have no savings, and the richest hold dollars or yuan. Food sellers are expected to suffer the most, since food sales across the country are carried out in cash.
UPDATE 9: Although Good Friends reports have a reputation of being hit and miss, here is their report on the DPRK’s currency conversion. The usual caveats apply.
UPDATE 8: Here is an English translation of an interview with the head of the North Korean Central Bank (PDF). I got the interview here. (h/t Adam Cathcart)
UPDATE 7: The Choson Ilbo points out that monetary revaluation has been an on-and-off policy goal of the North Kroean government since 2002:
The large-denomination bills, such as those worth 5,000 and 2,000 won, bear the stamp “2008” on the upper left. Images of the 500, 200, 100, 50, 10 and 5 won bills and those on the back of 1 won, and 50, 10, 5 and 1 jeon coins bear the stamp “2002.”
“It seems that the North printed the new bills and coins in 2002 when it implemented the July 1 economic reform plan, where it introduced a modicum of market capitalism, but decided not to circulate the new currency that year apparently due to runaway inflation,” a source said. “And the North again apparently prepared for currency reform in 2008 by printing new large-denomination bills but postponed the reform because leader Kim Jong-il had a stroke.”
UPDATE 6: The rules continue to change. According to the Daily NK:
“The maximum amount per household which could be exchanged in cash was initially set at 100,000 won, but overnight it increased to 150,000 won, then subsequently a new decree was handed down.”
“According to the new decree, the exchange rate is still 100:1 for 100,000 won, but now the authorities will only permit people to exchange the rest of the money at 1,000:1.”
As a result, if you take 200,000 won in cash to a bank, you get 1,100 won in new denomination bills. This emergency formula will do nothing other than destroy the fortunes of the people.
Another source reported that in the jangmadang practical trading had ceased, although rice was still on sale from traders dealing in the product from home. The price of a kilogram has apparently skyrocketed to 30,000 won in old denomination bills, a 15-fold increase.
Wealthy merchants generally do their business in Yuan or U.S. Dollars, so the harm to them is not so serious. At the other end of the scale, low end traders who live from day to day will not be hit too hard for the simple reason that they don’t have much cash.
However, people in the middle classes who have tended to hoard paper cash at home are facing a fatal beating.
UPDATE 5: The Daily NK and Yonhap have pictures of the new currency.
UPDATE 4: According to the Daily NK:
In the three days since the start of the exchange, the authorities have changed the policy a number of times. First they planned to allow each household to exchange 100,000 won; 1,000 won in new denominations. Then they changed it to 150,000 won. Then they changed it again to 100,000 won, plus 50,000 won more per family member in a family of four. That is, a standard household can now exchange a maximum of 300,000 won.
Additionally, the authorities announced an extra new decree whereby one could put the rest of one’s money, which cannot be exchanged into new bills, in the bank.
This near continuous flow of policy amendments has exacerbated public confusion.
Regarding excess monies above the limit for direct exchange, the authorities originally proclaimed that people could exchange it at a 1000:1 rate, but several hours later on the same day, revised it to people being able to deposit 200,000 won in the bank at the 1000:1 rate. However, on the morning of the 3rd, the authorities implied that the state would allow the people to deposit as much as they have, saying, “The whole deposited amount will be dealt with appropriately by the state.”
Naturally, residents do not really believe in what the authorities say because they had a similar experience in 1992; the people deposited 20,000 won, but the banks gave only 4,000 won back the next year.
UPDATE 3: Marcus Noland hits the nail on the head. He writes in the Wall Street Journal:
North Korea announced a surprise currency reform this week. The move isn’t about good economics, however; it is yet another stratagem by the central authorities to short-circuit the development of an entrepreneurial class independent of the state.
Currency reforms are not a bad thing in principle. Stable governments historically have used this tactic to draw a line under bad economic policies of the past, often after taming a hyperinflation. Good reforms typically involve knocking zeros off the old paper and issuing new currency, perhaps at approximate parity to major currencies such as the dollar or the euro to make it easier for citizens to hold their government accountable for macroeconomic performance. In recent years Turkey and Ghana, among others, have successfully implemented such reforms.
What occurred Monday in North Korea is different. Unlike a Turkish or Ghanaian-style reform, in which all citizens are encouraged to convert all their holdings of the old currency, the North Korean regime limits the amount of currency that can be converted. This renders excess holdings worthless, and has set off the frenzy this week to get out of old won and into anything else—dollars, Chinese yuan, physical goods—that will maintain value. Any economic “reform” also creates opportunities to parcel out benefits, as with a 2002 price and wage reform that favored the military.
This move is part of Pyongyang’s broader effort to curtail the rise of market activities and the development of pathways to wealth—and potentially power—beyond state control. Participants in North Korea’s bootstrap capitalism include everyone from laid-off factory workers to government officials who exploit their inside knowledge to deal privately in everything from grain to imported Chinese consumer goods.
In a society so highly atomized by the government, a private-sector market would be one of the few ways for North Koreans to interact with each other away from the state’s watchful eyes. So it stands to reason the regime would be worried about the market quite apart from any subversion of the state’s own economic machinery. Roughly every decade since the founding of the country in 1948, the government has initiated a currency reform or similar policy to confiscate the savings and working capital of private entrepreneurs.
There appear to be several particular spurs for the latest “reform.” North Korea relies on local production for about two-thirds of grain consumption, with most of the rest coming through aid. The recent harvest was reportedly poor and world grain prices are rising. This makes farmers more likely to divert food from government procurement to the black market. United Nations sanctions also are disrupting the country’s finances, affecting everyone and reducing the supply of luxury goods the regime dispenses as favors to supporters.
…
The upshot is that, despite both the currency reform and the legal crack-down on the private economy, the regime is not succeeding in stamping out the market entirely. The fact that Pyongyang has to keep trying indicates that North Koreans keep trying even harder to scrape together better lives for themselves. But the sheer ruthlessness of the Pyongyang regime and its extraordinary capacity for repression underline just what an uphill battle those North Koreans face against a regime determined to keep them down.
Also here are some more details from the Choson Ilbo:
Sources in North Korea say people have been told that money above the individual exchange limit must be deposited in banks, but the state also limits individual deposits to between 300,000 to 3 million won, and people are not allowed to freely withdraw money from their accounts. This has apparently stoked tremendous anger.
During the last currency reform in 1992, authorities permitted each person to deposit up to 20,000 won in the bank, but they were later allowed to withdraw only a few thousand won. Many were unable to withdraw any money at all.
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