[Viewpoint] Putting the market back in its bottle

It has been over a week since Pyongyang implemented extensive currency reform. While there was no official announcement, the Choson Sinbo, an organ of the pro-Pyongyang General Association of Korean Residents in Japan, reported that North Korea reformed its currency system on Nov. 30 and exchanged bills. During the short period of one week, North Koreans exchanged the existing bills for new notes. In this dramatic reform, individuals could change old North Korean won for new at a rate of 100 to 1, but the amount was limited to 200,000 won per household, so the rest was virtually confiscated by the state.

Also, circulation of foreign currency has been completely prohibited. The authorities want to eradicate the black market by cutting off dollar transactions and forcibly taking foreign currency that individuals possess. The privileged class that attempted to dodge the impact of the currency reform by accumulating wealth in dollars is expected to be hit by the measure as well.

Why did North Korea choose this moment for its shocking currency reform?

Most of all, the reform measure suggests an intention to tighten the system of state control. Since the economic control improvement program of July 1, 2002, Pyongyang partially introduced a market economy. It raised wages and price levels to reflect reality and expanded the amount of currency in circulation. However, when materials and goods were not in sufficient supply, the North Korean economy suffered from extreme inflation. Today, prices have soared by over 30 times compared to seven years ago, and 3,000 won, the average wage for a worker, is not enough to buy a two-kilogram (four-pound) sack of rice.

So individualistic market trends spiraled out of the control of the North’s central government. North Koreans could only make a living by earning extra income through personal businesses. Corruption was widespread as people came to believe that money would buy them anything. Business-savvy capitalists accumulated enormous wealth by joining with power holders and hid their money away. In short, North Koreans came to worship money. The situation worsened as the United Nations Security Council passed sanctions against North Korea following the country’s nuclear test in May.

North Korean Chairman of the National Defense Commission Kim Jong-il and the top government officials must have felt cornered. They thought that if they continued to let the situation worsen, their pledge to build a strong and great nation by 2012 would be unattainable. The currency reform is a product of this sense of crisis. Pyongyang is likely to follow the currency reform with moves to appease public sentiment by increasing supply through state-run stores. Since the authorities played the long-planned currency reform card, it will continue to make efforts to revive the state-planned economy.

Jo Seong-hyeon, a chief officer at the Central Bank of the Democratic People’s Republic of Korea, claimed in an interview with the Choson Sinbo that the bank had prepared a “foundation” to end the abnormally loose currency. This reform is aimed at the privileged and the rich who have created a sense of alienation and a growing gap between the rich and the poor, so it is expected to resolve the dissatisfaction of the poor. If all goes as planned, the currency reform will accomplish its expected results despite some initial confusion.

However, things probably won’t go according to plan. Excessive state control undermining the market order is the biggest challenge. It will be hard to recover the trust of the national economy after this. The North Korean authorities might find themselves in trouble if they fail to soothe the resentment of the people who made money through their personal businesses. The government cannot rule out the possibility of the North Koreans taking collective action now that they have tasted a market economy. Compulsive oppression could aggravate the situation. If Kim Jong-il truly wants to revitalize the economy, he needs to make a decision for a more fundamental policy change.

The North Korean economy is standing at a crucial juncture. In the end, the only choice for the North Korean government is to give up the yoke of its own version of socialism and change the constitution of the economy through market opening and reform.

*The writer is a researcher at the Economic Institute of the Industrial Bank of Korea. Translation by the JoongAng Daily staff.

by Jo Bong-hyeon