[Viewpoint] A reform in need of reformulation

‘Politics is mighty, not almighty,” said German economist Andreas Predoehl, and his aphorism holds true in North Korea today. Pyongyang went on with a currency reform by using political force. The result: The political order is being reorganized by the economic order instead. High-ranking economic officials are being forced to step down, and market trades are again a force. Economic theories are triumphing over political rhetoric.

The recent currency reform was destined to be a catastrophe. Pyongyang greatly underestimated the monetary economy created in the seven and a half years since the last economic control measure of July 1, 2002. The authorities must have thought they could turn back the clock to the beginning with one political blow. Thus, they pursued an absurd currency reform that lacks logical grounds.

However, the market economy, which has already penetrated into North Koreans’ daily lives, rejected the reform. A market refuses artificial control. The market, which reflects fundamental human nature, grew powerful enough to strike back at the authorities who failed to address the concerns of the people.

The problem that faces the North Korean economy is basically a matter of circulation. Since the revaluation, money and commodities have not circulated properly. The extremely painful inflation reflects an environment in which transactions are not made.

The problem stems from North Koreans’ distrust of their currency. Because they do not trust the currency - and the government’s monetary policy - the people are unwilling to trade money and commodities. For the same reason, the exchange rate of North Korean currency against foreign currencies has skyrocketed. As the flow of daily necessities becomes bottlenecked, poverty and starvation spread.

Moreover, North Korea is struggling through a harsh winter, and the severe weather has only aggravated the economic struggle.

Then, preposterously, the North Korean authorities suspended market transactions, adding gas to the fire.

What actions does North Korea need right now? First of all, Pyongyang desperately needs to allow businesses and trading among the people, even if that undermines the fundamentals of socialist economic systems. As long as it does not bring about the immediate fall of the regime, barter and currency trades should be facilitated while the sudden spike in prices is contained through price guidance.

Second, North Korea should allow the use of old bills that have not yet been exchanged for new ones, and the exchange rate against the new banknotes should be maintained constantly. Stable circulation of old and new bills allows the proper trade of commodities and money. Only under these conditions will people trust the new banknotes - and once trust has been established in the new currency, trade and business would expand.

Third, the North Korean government should introduce an immediate measure to procure domestic goods and money by accepting help from abroad. The best way to stabilize the price of daily necessities is to allow supplies from other countries. Pyongyang must use all the foreign currency available to import food and other necessities and focus on acquiring foreign investment and assistance.

Lastly, the North Korean authorities need to pursue a gradual system of reform. While expanding and acknowledging private businesses in the service sector, the government should expand the allowable boundaries of privately owned property.

Especially in regard to the third measure, North Korea is highly likely to accept Seoul’s demands and resume the tours of Mount Kumgang and Kaesong and the expansion of the Kaesong Industrial Complex. Tourism is an important channel of securing cash, and the Kaesong Industrial Complex is based on the “three exchanges”: communication, traffic and custom.

If it is wise, the South Korean government will translate these plans into reality.

*The writer is a senior research fellow at the Korea Institute for National Unification. Translation by the JoongAng Daily staff.

by Kim Young-yun