Op-eds

Kim Jong Il's Fake Currency "Reform"

by Marcus Noland, Peterson Institute for International Economics

Op-ed in the Asia Wall Street Journal
December 2, 2009

© Asia Wall Street Journal

 


North Korea announced a surprise currency reform this week. The move isn't about good economics, however; it is yet another stratagem by the central authorities to short-circuit the development of an entrepreneurial class independent of the state.

Currency reforms are not a bad thing in principle. Stable governments historically have used this tactic to draw a line under bad economic policies of the past, often after taming a hyperinflation. Good reforms typically involve knocking zeros off the old paper and issuing new currency, perhaps at approximate parity to major currencies such as the dollar or the euro to make it easier for citizens to hold their government accountable for macroeconomic performance. In recent years Turkey and Ghana, among others, have successfully implemented such reforms.

What occurred Monday in North Korea is different. Unlike a Turkish or Ghanaian-style reform, in which all citizens are encouraged to convert all their holdings of the old currency, the North Korean regime limits the amount of currency that can be converted. This renders excess holdings worthless, and has set off the frenzy this week to get out of old won and into anything else—dollars, Chinese yuan, physical goods—that will maintain value. Any economic "reform" also creates opportunities to parcel out benefits, as with a 2002 price and wage reform that favored the military.

This move is part of Pyongyang's broader effort to curtail the rise of market activities and the development of pathways to wealth—and potentially power—beyond state control. Participants in North Korea's bootstrap capitalism include everyone from laid-off factory workers to government officials who exploit their inside knowledge to deal privately in everything from grain to imported Chinese consumer goods.

In a society so highly atomized by the government, a private-sector market would be one of the few ways for North Koreans to interact with each other away from the state's watchful eyes. So it stands to reason the regime would be worried about the market quite apart from any subversion of the state's own economic machinery. Roughly every decade since the founding of the country in 1948, the government has initiated a currency reform or similar policy to confiscate the savings and working capital of private entrepreneurs.

There appear to be several particular spurs for the latest "reform." North Korea relies on local production for about two-thirds of grain consumption, with most of the rest coming through aid. The recent harvest was reportedly poor and world grain prices are rising. This makes farmers more likely to divert food from government procurement to the black market. United Nations sanctions also are disrupting the country's finances, affecting everyone and reducing the supply of luxury goods the regime dispenses as favors to supporters.

The currency reform isn't the only way Pyongyang is trying to crack down on nonstate economic activity: The penal system increasingly is being used to control market-oriented activities, with the added benefit of facilitating predatory extortion.

Changes to the North Korean criminal code approved in 2004 and 2007 include expansive definitions of economic crimes that, if taken literally, prohibit a wide range of standard commercial activities. This includes up to two years of "labor training" for individuals convicted of engaging in "illegal commercial activities, therefore gaining large profits." The code also bars "illegally giving money or goods in exchange for labor." Capital punishment is to be meted out for "extreme cases" of theft of state property and for drug dealing, and increased punishments are prescribed for "illegally operating a business, such as a restaurant, motel or store."

Surveys of defectors suggest that the repressive apparatus of the state is disproportionately targeting those involved in market-oriented activities. Participants in market activities are more than half again as likely to be detained as other citizens. These are often traumatic events. Of those who had a run-in with the law, only 13 percent of the respondents to a defector survey I conducted in 2008 with Stephan Haggard of the University of California San Diego reported receiving any kind of trial or formal legal process. Prisoners enduring a typical-length incarceration in a low-level "labor training center" often used to house economic criminals observed horrific abuses at astonishing rates: execution (observed by 60 percent), forced starvation (90 percent), and death by torture or beating (20 percent).

This repression benefits the regime in many ways. Among others, high levels of discretion with respect to detention and its associated abuses encourage bribery. The more arbitrary and painful the experience with the penal system, the easier it is for officials to extort money for avoiding it. These characteristics not only promote regime maintenance through intimidation but also facilitate predatory corruption.

The upshot is that, despite both the currency reform and the legal crackdown on the private economy, the regime is not succeeding in stamping out the market entirely. The fact that Pyongyang has to keep trying indicates that North Koreans keep trying even harder to scrape together better lives for themselves. But the sheer ruthlessness of the Pyongyang regime and its extraordinary capacity for repression underline just what an uphill battle those North Koreans face against a regime determined to keep them down.



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