[Viewpoint] The North must make a hard choiceJang Hak-soo’s book titled “Burying Youth Under the Red Star,” published in 1990, came as a big shock to Communist-leaning university students. Jang, who voluntarily defected to North Korea, swam across the Tumen River after completing his studies in Russia. His book describes the tragic situation that was facing North Korea and Russia. The book created a great sensation. As many illusions about communism were shattered, many people swore to renounce their views. Jang also provided a detailed description of the situation before Russia carried out its currency reform. “When rumors of Russian currency reform circulated, people shouted with joy because of expectations that numerous side effects of economic opening would be corrected,” he recalled. “However, the reality was quite different. Increasingly large numbers of people living in poverty were seen standing in queues in front of state-run shops.” In fact, Russia went bankrupt six months after implementing currency reforms. Russia, which had continued to eke out a living with the help of foreign loans, survived this dark era thanks to the rapid increase in oil prices.
Two months earlier, North Koreans also greeted currency reforms in very high spirits. Last Wednesday, it was reported that the director of the finance and accounting department in the ruling Workers’ Party had been sacked, and an increasing number of people are dying of starvation. The North is facing a backlash. North Korean news Web sites reported that commodity prices and exchange rates keep soaring with the disappearance of commodity markets. Currency reforms can have a major ill effect on society. The criterion for success or for failure is the capacity to provide commodities and services essential to sustain life. In North Korea, the Unification Ministry says that rice production in the last year exceeded four million tons, and the struggles for 50-day and 150-day supplies face hurdles. There are no signs that indicate that the North has the capacity to provide most of the commodities required.
North Korean leader Kim Jong-il might envision using the private-sector funds accumulated in the countryside market-oriented economy as the new engine of economic growth. However, if the market economy that amounts to 30 percent of the North Korean economy is paralyzed, a food and commodity crisis will be exacerbated. If inflation gets a major boost due to a shortage of commodities, those commodities will continue to disappear. This is the so-called exit of goods. But the market conceals itself but never vanishes. Items of comparable value are traded in a barter system to meet basic demands every day in the North.
There are only two choices left for North Korea. First is the Zimbabwe model. The government of Zimbabwe confiscated farms and expelled foreign capital from the nation while carrying out currency reforms twice since 2006, issuing money incessantly. As the detrimental effects of inflation were pervasive, the government forced merchants to provide essential commodities by resorting to arms. Commodity shortages became more aggravated due to the exit of goods. In the end, the government issued an order requiring merchants to sell goods at or below designated prices. As a result, many companies went bankrupt, having an extremely negative impact on the provision of goods and services. Zimbabwe went broke, grappling with a record 200 million percent inflation. A 100 billion dollar bank note was not enough to buy three eggs.
The other choice is the German model. Germany carried out a currency reform with the cooperation of the United States in June 1948 after its defeat in World War II. The U.S. poured $1.2 billion into the market by implementing its Marshall Plan. Trust is the secret to Germany’s success. “A great miracle happened in Germany in a single night. Merchandise is displayed properly and no one flees in search of food,” observed one Yale University professor. Currency reform turned out to be a blessing in disguise because labor productivity grew. The resulting increase in production resulted in the Miracle on the Rhine.
It may already be too late for the North to execute several scapegoats by firing squad for causing the side effects of currency reform. If North Korea is prepared to become another Zimbabwe in Asia, it may choose a path that will lead the North to bear hardships.
However, if it wants to adopt the German model, its cooperation with the South and China is desperately needed. Trust is a prerequisite to this end.
President Lee Myung-bak is wisely urging the North to resolve the nuclear issue, while opening the possibility of having an inter-Korean summit. He is offering North Korea a “grand bargain” - giving up its nuclear plans for aid and security guarantees. This time, the North should take a huge step back. What is certain is this: in 2010 Kim Jong-il will suffer from long and deep anxiety.
*The author is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho