Market Conditions and Social Transformation Since the Currency Reform
October 26, 2010
The following is the prepared text of a presentation at the 2010 International Conference on Human Rights sponsored by NKnet, the Sejong Institute and NED. The conference was held in Washington, D.C., on October 21.
■ Contents of North Korea’s Currency Reform and Short-term Impact
1) Contents of North Korea’s currency reform on November 30, 2009
(2009.11.30 ~ 2010.1.20)
• North Korea undertook a currency reform, exchanging the old currency to new currency at a rate of 100 to 1, on November 30. For each household, up to 100,000 won of old currency was exchanged, but for each additional household member, 50,000 won could be exchanged more. For a four-member family, total 300,000 won could be exchanged to 3000 won of new currency.
• An additional 100,000 won could be exchanged at a rate of 1000 to 1, and the rest will be available for withdrawal, after depositing into bank account. The rate means 1,000,000 won of old currency is exchanged with 1000 won of new one, so it is meaningless.
• Following the currency reform, 5000 won of monthly salary is provided to a four-member laborer family from January 1, in average. North Korean government also provided up to 150,000 won to each farmer who achieved state target, starting from mid-December, and 16,000 won to those who failed to reach the goal, in new currency.
• Authorities closed general markets (private markets allowed by the government) from December 1, and only permitted transaction in state markets. Limited farmers’ market, in which some vegetables were allowed for sales, and usage of foreign currency was strictly prohibited, originally punishable with prison sentence but even more harshly punished for the time being. Especially, the government attempted to restore state ration system, by preventing food transaction among people, and ordering to provide food through salary and state markets.
2) Purpose of currency reform by North Korean government
• One Korean Central Bank official was quoted as saying “the purpose of currency reform is to make currency circulation smooth to fasten socialist, strong economy, to protect interest of laborers, and to stabilize their living condition.”In North Korean market, idle currency almost disappeared. Also, as shown in the exchange limit, it is contradictory to stabilizing people’s lives.
• Since 2000, accumulation of wealth through market became permanent, and governmental control over economy became weakened. Given measures like providing salary to the laborers, prohibiting jangmadang, and restoring state markets after currency reform, it is interpreted as an attempt to strengthen control over people and rebuild state ration system.
• As people gained profit from market and make a living, big merchants had accumulated wealth, but the capital did not return to the state. Also, due to international society’s sanction on arms export and illegal transaction, and the suspension of South Korea’s aid, financial condition worsened and the necessity to improve the situation became urgent
3) Political/economic impact of currency reform on people
• The core of currency reform was the exchange limit. For North Korean residents who rely their living on market, average monthly expense (four-member family) was estimated 150,000 to 200,000 won. Middle class North Koreans had prepared at least several months’ living expenses. As a result of the reform, they now owned two months’ living expenses as asset. Those who have foreign currency, like wholesalers, suffered no loss.
• Those who were hit the most were market merchants, who lost all capital and profits. Also, the family members of defectors, who received money from the outside defectors, possessed high percentage of cash, and they suffered some loss. Some responded by exchanging old currency in the name of the poor, who did not have any cash and giving them commission in exchange.
• As jangmadang was prohibited after the reform, people panicked. They suspected whether the price would be stabilized at the 100:1 rate or goods be supplied enough at state market.
• The anger of those who lost assets by the currency reform intensified. Most of them worked hard to earn the assets, and their sense of loss was great. Rumors about distributing cash or burning it were widespread. While there were rumors of demonstration and resistance, they seemed to be on a small scale. The currency reform took away people’s willing to live, and many committed suicides.
■ North Korean authorities apologize for currency reform and allow jangmadang (1.21-3.30)
1) Apology for currency reform
• Popular sentiment worsened after currency reform, and the number of death by starvation increased as jangmadang closed. Also, since the currency was exchanged at 100:1 rate, the rice price should have been lowered to 20 won (per kg) from 2000 won, but by mid-January, the price already rose tenfold, to 200 won. The 3000 won, distributed as a result of the reform to a four-member family, could only buy one month’s rice. Individual complaints against officials increased.
• Between January 26 and 28, at the April 25 Culture Palace in Pyongyang, Prime Minister Kim Young Il announced an apology on currency reform before local representatives and promised to take measures.
• Afterwards, apology descended to local neighborhoods through neighborhood representatives. It says, ‘Due to economic difficulty, government conducted currency reform, but officials made mistake of causing disappointment and inconvenience. As the General was dismayed by this, we must serve him more loyally.’ Park Nam Ki, financial chief of the KWP, was executed for this.
• On the Prime Minister’s apology, residents were not interested to it, and even said that they ‘would not be deceived again.’
2) Permitting jangmadang again.
• North Korean authorities allowed jangmadang from February 1 everywhere. In fact, closure of jangmadang was impossible to continue, because production and distribution ability was collapsed. Merchants started business with existing goods, new currency, private loan and future payment-system.
• From February, factories, where production was ongoing, gave salary independently. For the rest, salaries were not paid, going back to the situation before the currency reform.
• At first, merchants suspected the measure, but after a few days, the number of those who were resuming business increased. However, because of hyperinflation, transaction of goods other than food was stalled. North Korean authorities sold the right to own stand for 500 won, and acknowledged the presence of inflation.
• As jangmadang resumed, the price, which showed temporary stability, skyrocketed, and in early March, it rose by sixty times, compared to right after the reform. As of March 8, rice price in Pyongyang reached 1300 won, 50% of the price before the reform. Thus, redenomination became meaningless.
• The main reasons of hyperinflation of rice price were lack of trust on North Korean currency after the reform, shortage of supply and rising exchange rate.
• Afterward, rice price dropped in April, stabilizing at around 600 won.
■ Jangmadang news from April to July
1) Continuation of stability in rice price
• Price seems relatively stable. The reason is expansion of supply by North Korean authorities through Sino-Korean trade. Also, based on the testimony of residents on shortage of money circulation, it seems that government is investing it to state projects rather than supplying to people.
• Also, most people have low purchasing power, because they are not fully recovered from the aftermath of the currency reform. An increased food sale at the markets is an evidence of dietary practice of people.
2) Increase in demand for foreign currency
• In February, jangmadang was permitted and crackdown on foreign currency usage decreased, and from April, foreign currency usage became unrestricted. Money changers, caught after the reform, were released. In the border area, Chinese yuan is preferred, and in inland areas like Pyongyang, dollar is preferred. Except for small-amount transaction, foreign currency becomes medium of transaction.
• The reason of vibrant circulation of foreign currency is that domestic currency is concentrated in some merchants, additional currency is not issued, and laborers salaries are not provided, so the total amount of circulation is small. Also, due to the currency reform, distrust on domestic currency increased, and merchants prefer dollars over won, so the circulation increased.
3) Sales status
• Grain price fell a lot, so sales is relatively active, but sales of industrial goods like clothing or living supplies are inactive. Transactions are not as many as before the reform, but the number of business people is increasing. Due to market tax, the so called grasshopper merchants, selling not inside the market but outside streets, are increasing.
• Also, at Pyongsong market, dollar or yuan-indicated clothing, electronics and living supplies appeared. Originally, such practice should have been prohibited, but there was not particular punishment. It shows that buyers also prefer foreign currency.
• Some say that foreign currency usage is restricted, but this is far from the reality. In most areas, usage of foreign currency is free and ongoing. If North Korea manually prohibits usage of foreign currency, the value will be increased, causing inflation.
4) Status of jangmadang
• As before the currency reform, people are disgruntled that market tax is unchanged even though the value of currency dropped. Therefore, many people hide from managers not to pay the tax, but managers of markets are fighting a tug of war to receive the tax.
• Food sale is profitable, but other items are not. Noodle sale can make profit if it is done in large amount, but because of lack of electricity, it can’t be produced in large amount. Most make 10~15kg, and 1000 to 1500 won is left as profit.
• Currently, North Korean ordinary laborers’average income is 3000 won per month. However, even this is received by the employees of the 30% of North Korean factories that are actually operating. The rest 70% is excluded.
• 3000 won per month could buy 3kg of rice, and 6kg of corn. If the minimum daily grain for a four-member
family is 1.7kg, 3kg of rice is 2 days’and corn is 4 days’. People still depend on market or side job.
• According to a recent research, the minimum cost of living for four-member family is 50 to 60,000 won. The expense for food is 35,000 won (50~60%), 10,000 won for food and other basic commodities (15~20%), and 15,000 won for other expenses (20~30%).
• Therefore, North Korean people can survive with 50 to 60,000 won per month. Thus, it is calculated that they have to earn 1500 to 2000 won at jangmadang per day. This could be the minimum survival amount. Since it is estimated that sales people at jangmadang could earn at least 1500 won per day, so they seem earning enough to survive.
• However, without sales, the weakest class lives by local government’s subsidy, begging, gleaning, day labor and stealing.
• Although not known accurately, those who are classified as the so called‘ officials’, are less than 500,000, except for military officers. The middle class is about 10 million and the poor is about 13 million. 30% of the middle class (3 million) could be assumed becoming the poor, due to the currency reform.
• Market in people’s lives has become stronger than before the reform, and people’s distrust became bigger. Many felt stolen by the authorities. Afterwards, market activities will be the basis of people’s lives, and the foreign currency’s occupation rate will be increased. North Korean authorities might attempt even confiscation of foreign currency, and this would be another variable that shocks the markets.