The devaluation of the North Korean currency–implemented without prior warning in November, 2009–confirmed something that had been increasingly apparent since 2002: among the most pressing issues facing ordinary North Koreans today is ensuring access to secure stores of value for their assets and one of the most effective means by which to do so, in particular for urban residents, is via the increasingly popular medium of foreign currency.
Foreign currency access is a crucial tool for the North Korean people not only because inflationary pressures are putting the North Korean Won (KPW) under increasing strain, but because the North Korean government has demonstrated a readiness when necessary to take the assets of the majority for the benefit of a minority.
Such confiscatory economic policies are not without global precedent; history is littered with decisions that had serious consequences for specific groups in the target society. However, countries like North Korea, with their undemocratic systems of governance, non-existent property rights, banking systems that are wholly subordinate to official decree, and state ambivalence or hostility to free markets, leave citizens with a limited choice of value storage options, and this amplifies the danger these decisions pose.
In the case of North Korea, although other foreign currencies are also used for the purpose of storing value, the prevalence of the phenomenon in towns and cities along the border with China has led me to brand the process Yuanization.
STATE FORFEITS CONTROL OF LIVELIHOODS
To understand the importance of Yuanization, it is important to look back into the history of North Korean marketization.
Small farmers’ markets and a handful of other low-impact private commercial activities have actually existed in some form or another throughout much of the country’s 60-year history. For the purpose of this article, however, that history is taken to begin in 1994 and continue through the present day.
Nevertheless, widespread market activities only firmly took hold in the mid-1990s. This was due primarily to the creation of a space, both political and physical, into which private commerce could be inserted.
The most commonly cited catalysts for this process of governmental regression and space creation were the collapse of the Soviet Union in 1990-91 and the death of national founder Kim Il Sung on July 8, 1994. These are also generally seen as the primary causes of a famine that killed anywhere from 600,000 to three million people over the course of three to five years, mostly, but far from exclusively, in the rural north of the country (Chagang, Ryanggang and Hamgyong provinces).
This history should, however, be put into broader context. High-level sources demonstrate that the North Korean leadership was aware that the command economic model was failing much earlier than this.
“I didn’t have all that much interest in statistics, but it was impossible not to notice that the North Korean economy was constantly recording minus figures,”
former Korean Workers’ Party (KWP) International Secretary Hwang Jang-yop notes in his 1998 memoirs.
“It was no coincidence,” Hwang goes on to say, “that the time when Kim Jong Il came to power and the time when the North Korean economy went into decline occurred simultaneously.”
Kim assumed a critical mass of political power in September 1973 when he took over the party departments in control of personnel and propaganda, and was in full control by 1980; therefore, Hwang’s claim is that Kim Jong Il knew in the 1970s that the North Korean economy was faltering badly.
Even if the economic signals at that time were inconclusive, Hwang also records that “after 1986,” the situation began to take an even more desperate turn, another data point that falls years prior to either the death of Kim Il Sung or the collapse of the USSR.
However, no economic policy of significance was implemented by the governments of Kim Il Sung and Kim Jong Il in response to either this state of affairs or to clear reform signals emanating from Beijing and Moscow.
As a result, by the time events on the ground had begun to reach a head in 1994-5, millions of people had already stopped receiving the rations that met their minimum daily needs under the state-run Public Distribution System (PDS). According to refugee interviews cited by Marcus Noland and Stephan Haggard in Witness to Transformation, state distribution had ceased to provide for most people by 1993.
THE TYPICAL CASE OF MR. LEE
In response, North Korean citizens adopted a range of coping strategies.
Household consumption declined sharply; direct, unofficial barter between individuals increased; foraging on hills and mountainsides grew exponentially; defector numbers rose; and soliciting funds from more affluent family members became routine. Many people also entered the unofficial economy, which developed rapidly.
Markets took firm root thanks to the hard work of individuals, trading entities and loose coalitions, who created a system of not only markets but also transport and logistics.
Mr. Lee was one such person, and an interesting study in what coping with famine conditions through the unofficial economy meant in practice. A resident of Hyesan, the largest city in Ryanggang Province, his career remained on an unremarkable trajectory through the 1980s and into the 1990s.
He graduated from high school and entered the military, where he rose through the ranks, and, upon being discharged, attended and graduated from the Korean Workers’ Party school. At that time, a party card was a guarantee of the desirable benefits only available to officials. A newly minted party cadre, Mr. Lee soon found himself dispatched to oversee the work of a public utility in Hyesan.
However, the Public Distribution System had already begun to show signs of deterioration, and events soon started to spiral out of control. Over a relatively brief period of months, the manager of 28 workers–without the support of a rationing system through which to meet their daily needs–Mr. Lee found himself isolated.
Therefore, knowing that many of the medicinal herbs growing wild in the hilly northern areas were popular in China, he organized his men to abandon their work and gather them. In the dead of night Mr. Lee would float bags of the herbs across the Tumen River on an inner tube, and a Chinese partner on the other side would float back bags of wheat flour.
By distributing this bartered income among his subordinates and their families, Mr. Lee and his team survived the “Arduous March.”
Markets took firm root thanks to the hard work of individuals, trading entities and loose coalitions, who created a system of not only markets but also transport and logistics. The resultant system came to supply an overwhelming majority of the food and other necessities that helped at least 95% of civilians survive the complete loss of state support.
PYONGYANG BOUNCES BACK
However, although the state forfeited much of its control over the livelihoods of the population during the famine, it never ceded its right to pass and enforce legislation and, by 2000, the administrative apparatus had recovered sufficiently to try and wrestle back control of the marketization phenomenon.
While constitutional amendments made in 1998 are said to mark the opening gambit in this plan to return to preeminence, it is the Economic Management Improvement Measure of July 1, 2002 that was the greatest and best known.
Existing markets were legalized, and prices and wages elevated dramatically under the measure. Modest autonomy was also subsequently granted to enterprises, while Robert Carlin and Joel Wit also assert the existence of a debate within the government as to how far liberalization should be allowed to go.
However, there was another side to the 2002 coin: namely, a confiscatory element that targeted those who had accumulated capital during and after the famine. In other words, by raising prices and wages dramatically, without warning and without countermeasures to support losses incurred, the policy automatically and unavoidably eroded the value of liquid assets.
“People around me learned right then in 2002 that you had to have foreign currency to be safe.”
This was the birth of Yuanization: the time when those few persons who held domestic currency in significant quantities were shown evidence that their wealth was at risk of expropriation or devaluation by the forces of state.
Any debate about the true intent of the DPRK government in making the 2002 economic changes remains fierce, but is ultimately irrelevant. It was what it was, and those few people with money lost much of it. Ms. Jang, another refugee from Wonsan in Gangwon Province and someone who, like Mr. Lee, had parlayed a military career into fiscal stability during and after the famine era, put it this way: “People around me learned right then in 2002 that you had to have foreign currency to be safe.”
FIVE DAYS OF PAIN: MOBUTU’S ZAIRE
Debate over the intent behind the 2009 currency redenomination also continues to this day. Either it was an honest but foolhardy and extremely unsophisticated attempt to rein in inflation, or a full frontal assault on the market economy. A few, drawing the link between 2002 and 2009 extremely tight, believe that the it had actually been planned since 2002, and cite the dates of production on some of the new currency as evidence of this.
The details of the policy are not subject to debate, however. It was not announced until it began on the morning of November 30, 2009. Under it, the old North Korean Won was exchanged at a rate of 100:1, but with a limit on per person exchanges. Initially this limit was set at 100,000won, but was later raised to 150,000won following public protest. Families could exchange a certain sum per family member, while a further 300,000won could also be exchanged, but only if it was put into a state-run bank. The state was to announce new prices for goods, and the entire exchange process had to be completed within seven days.
In line with the “inflation control” first hypothesis, one official from the DPRK central bank told the pro-DPRK newspaper Choson Sinbo some days after the redenomination took place that it had been done because inflation was undermining the state’s policy to cope with issues beyond North Korea’s direct control: natural disasters and the collapse of the Soviet Union. Under such an interpretation, the currency reform was a key plank in efforts to right the listing North Korean economic ship.
However, as in the case of 2002, the shape of the policy to specific groups on the ground was one of expropriation of assets by the state.
“Confiscatory currency reforms are a form of asset redistribution, or more accurately, asset levelling. Such conversions either tax those with excess cash balances (if they can be deposited in bank accounts on unfavourable terms and subsequently withdrawn) or destroy ‘excess’ cash wealth altogether,” economist Marcus Noland and political scientist Stephan Haggard, wrote in a January 2010 policy brief:
“In the North Korean case, this last motive appears central: Currency reform was designed to target groups engaged in market activities that not only generate cash earnings but also require cash balances given the underdevelopment of the North Korean financial system, while at the same time providing compensatory allocations to favoured groups closely connected to the state.”
The events of that day have strong parallels with the 1979 “demonetization” of Zaire. Implemented in December that year by another authoritarian, Mobutu Sese Seko, demonetization also had a time limit, strict limits on amounts that could be exchanged, and resulted in the expropriation of the middle class.
In the Zairian case, the time limit was five days, though a number of these were weekend days on which banks, the location for all exchanges, were to be closed. Due to the geography, poverty, poor infrastructure and largely rural population of Zaire, this was tantamount to a guarantee that many citizens could not reach a bank in time to exchange their assets.
“The losers were the majority of farmers who lost their life savings, usually kept in pillows, mattresses or jars.”
Again just as in North Korea, there were strict limits on amounts of old currency that could be exchanged for new. Individual citizens were allowed to exchange just 3,000 units of the old currency. Small businesses were allowed to exchange 5,000 units, while larger companies were limited to 20,000 units.
President Mobutu subsequently indicated that his government had intended the policy to encourage people to use banks, and had hoped to rein in inflation and create a stronger currency by recovering sums stored by speculators in the unofficial economy.
However, many researchers from the era do not believe that the policy was driven by developmental motivations, a position demonstrated by the case of a number of credit cooperatives. Despite a membership said to be around 32,000 and funds totalling more than 5 million units of old currency, the Zairian central bank branded them illegal financial entities and refused to allow them to change any money at all.
Conversely, at the other end of the spectrum it is estimated that state employees in banks and other privileged positions appropriated between 20% and 40% of the total new money supply.
“The big winners were bank managers and high-ranking officials who had no limit in exchanging their banknotes to new ones,” Dr. Emizet Kisangani, an African Politics specialist said of the policy.
“The losers were the majority of farmers who lost their life savings, usually kept in pillows, mattresses or jars.”
It’s possible that President Mobutu was speaking honestly when he said he had wanted to strengthen the banking system through the demonetization, and the same goes for the North Korean central banker. However, rhetorical statements of intent are still far less pertinent than on-the-ground reality.
Thus, in Zaire as in the DPRK, the result was the de facto expropriation of a new, trading, middle class. For those traders, therefore, one inevitable response was to store value in foreign currency, which cannot easily fall prey to poor state economic policy.
YUANIZATION: AN INEVITABLE RESPONSE
This is what is happening in the era of Yuanization. For the broad mass of people who were living hand-to-mouth in 2002 the message may have been indistinct. But by the time economic conditions had improved somewhat in 2009, it was impossible to ignore. Through the redenomination, the North Korean government–whether wittingly or not–incited a move toward the holding of foreign currency.
A majority of market transactions in most parts of North Korea now involve foreign currency on some level. The below video frames show one such transaction taking place in Hyesan, a city in Ryanggang Province on the border with China.
Conversation with the North Korean civilian who made the above video revealed that the transaction was far from a one-off: prices in the market in question are denominated in Yuan, and 90% of transactions now employ foreign currency. The figure has been put at 80% in Heoryong, a border city further along the border in North Hamgyong Province, and Seoul-based economic researcher Kim Kwang-jin believes it could be as much as 60% in port cities further from the border such as Nampo and Wonsan.
THE RISING DEMAND FOR FOREIGN CURRENCY
This does not mean that people are bypassing the North Korean Won and using foreign currency directly with traders at all times. Notably, there is an absence of low-denomination Chinese Yuan and US Dollar banknotes and coins, while the use of foreign currency is also illegal and periodically enforced.
Local currency is still often used for day trading in markets, therefore, whereas value is stored for periods longer than 24 hours in foreign currency.
According to the data, direct trade in foreign currency is common along the Sino-DPRK border, while storage of value plays a more important role inland, and in rural areas where currency is used as an alternative to foodstuffs–an alternative store of value but one that is vulnerable and hard to conceal.
The key to the system is a network of nodes: individuals, many of Chinese-Korean ancestry, whose major business is exchanging currency, and a large number of subordinate traders.
Indicative of the relationship between the official and unofficial economies in the DPRK, these individuals are politically well-connected, and avoid periodic crackdowns on their activities through their links, often familial, to the Ministry of Public Security, State Security Department, and/or the Korean Workers’ Party.
As this research shows, there is rising demand for foreign currency in today’s North Korea. The phenomenon has been developing since 2002, and accelerating since 2009. Reflected by the case of Zaire’s 1979 “demonetization.” it is clear that the growth in foreign currency usage is a direct outcome of a confiscatory state economic policy.
This is logical. North Korean citizens are inherently self-interested just like everyone else, meaning that when they first encountered evidence that domestic currency could no longer act as a reliable store of value, they began to seek other means of achieving the same end.
As such, foreign currency access in the modern DPRK not only represents a positive contribution to human security in the country; it is also a very serious threat to the government of Kim Jong Un.
(Illustration: James Pearson for NK News)
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