North’s currency action shocking to its citizens

North Korea’s unexpected decision to revalue its currency this week had officials and analysts guessing about the motive behind the move. It may have been a purely economic decision, but it also appears to have political overtones.

The decision apparently shocked the North Korean public. Xinhua News Agency in China reported that shops were being forced to close and North Korean citizens were in collective panic.

On the surface, the currency reform appears to be aimed at curbing inflation. But a closer look at the state of the North Korean economy reveals that the regime may also have wanted to stifle underground economic practices.

According to intelligence sources, North Koreans have for a few years been piling up cash by running personal businesses and have kept their money literally inside their closets.

In the North, say intelligence officials, citizens see little benefit in saving their earnings in bank accounts because interest rates are low and because they are often unable to make withdrawals. Cho Bong-hyun from the Industrial Bank of Korea’s economic research institute said such a low level of cash flow has had a trickle-down effect on industries as a whole, noting that manufacturers haven’t been able to purchase raw materials.

“North Koreans are restricted from making profits through businesses other than their day job,” Cho said. “But people often make more money from their personal ventures than from their work. The government wants to crack down on such slush funds and also to encourage a better flow of cash to help the economy.”

Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington and an expert on North Korea’s economy, echoed the sentiment. He told the Associated Press that the currency revaluation was designed to “strike a blow against people who are engaged in market economic activities that are beyond state control” and that North Korea is “fundamentally uncomfortable with the development of an entrepreneurial class.”

Other analysts said the North may have attempted to stabilize and rebuild its economy before Kim Jong-il’s anticipated handing over of the reins of power to his third son, Kim Jong-un.

A government official in Seoul pointed out that securing the public’s support was a must before the succession and improving the economy by reforming the currency would help. Cho, the Industrial Bank of Korea researcher, said the North Korean public would not be pleased if the succession of power took place before the economy bounced back.

By Yoo Jee-ho [jeeho@joongang.co.kr]