Authors: Andrei Lankov
In late 2009 North Korean leaders decided to inflict a major blow to the market system, wiping out capitalistic activities and punishing independent entrepreneurs (also known as “shameless anti-Socialist profiteers”), while also rewarding those few who remained loyal to the Party and Leader in the midst of turmoil. Judging by some peculiarities that occurred during the subsequent events, it seems that it was not so much the faceless “leadership” but rather Kim Jong Il himself who was the mastermind behind the botched counterreform of 2009.
In 2009 the North Korean leaders used a well-known policy device—currency reform. Such reforms have been part of life in all Communist countries, but similar measures have been used in market economies to curb hyperinflation. The Soviet currency reform of 1947 initiated by Joseph Stalin himself can be seen as an archetypical operation of this type. The Soviet reform was later emulated by other Communist regimes, including North Korea, which underwent reforms of this type in 1959, 1979, and 1992.
The reform scenario is well known. One day, usually in the morning, the population suddenly learns that old banknotes are to become useless in a few days, and should be swapped for new banknotes. For note exchange, strict limits are set. For cash the limits are usually equal to a couple of monthly salaries, while money in bank accounts usually is treated with greater leniency and can be exchanged in somewhat greater quantities—but still within limits. The exchange period is made
deliberately short, usually a few days only, and the number of places where exchanges can be made is also limited.
The intended result of such a policy is a dramatic reduction in the money supply, which is very good for curbing inflation. In Communist countries, which tended to embrace this kind of currency reform, the policy had an important added benefit: it wiped out illegal savings of black market operators. People who lived on their official salaries and/or tended to keep money in government-controlled banks suffered as well, but to a far lesser extent when compared to the sorry fate of those involved in unsanctioned economic activities.
Accordingly, on the morning of November 30 (at 11:00 a.m., to be exact), the North Korean populace learned that old banknotes would go out of circulation. As was often the case with such reforms, it was accompanied with devaluation: two zeroes from the North Korean paper currency, the won, had to be lopped off, so 100 “new” won were supposed to buy as much merchandise as 10,000 “old” won. This would make the prices roughly similar to what they used to be in the early 1990s, just before the collapse of the state-run economy. The change of the banknotes had to be completed within less than a week and the exchange limit was initially set at 100,000 “old” won per person—equivalent to $30 on the then-ongoing exchange rate. Panic ensued, since many North Koreans, especially those involved in private economic activities, had significant amounts of cash holdings in North Korean currency. Many a private company faced collapse (as was intended by the reform planners).
The North Korean currency reform of 2009 had one striking peculiarity, however, which made it different from its prototypes and doomed it to failure. It was declared that all people who were employed by state-run factories and institutions—that is, virtually all those legally employed in the economy—would receive the same amount in the new currency in wages as they did in the old currency. This measure effectively constituted a hundredfold (that is, 10,000 percent) overnight increase in salaries and wages. Take, for example, the case of a skilled worker who dutifully attended his or her nonfunctioning factory and was before the currency reform paid 3,500 won per month. After the reform, the worker was still to be paid 3,500 won per month. At the same time, the price of all goods and
services was supposed to go down a hundredfold—for example, the price of rice was officially fixed at the level of 22 new won per kilo, instead of the prereform level of 1,800–2,000. This—theoretically!—implied that his “new” 3,500 won would buy as much as “old” 350,000 won.
For a while, foreign observers were taken aback by such a seemingly irrational move and speculated about secret designs behind the plan—or even refused to believe the first reports about the promised 10,000 percent rise of wages. However, it soon became clear that no secret design existed, and that reports were true indeed. Obviously, the people who approved the plan did not quite understand that by increasing salaries a hundredfold overnight they would produce a tidal wave of inflation, and not a dramatic increase in living standards.
North Korea has undergone currency reforms a number of times, and its financial experts are aware of similar reforms elsewhere—so one cannot help but wonder how such a bizarre feature made its way into the reform plan. One can speculate that planners initially intended to follow the well-established pattern and launch a standard confiscatory currency reform—that is, a reform in which most of the cash deposits would be appropriated by the state, and both salaries and retail prices would be decreased in equal proportions. However, it seems likely that at the last moment somebody intervened and ordered a dramatic revision of the plan, suggesting to dramatically increase official salaries.
The person who suggested this was unbelievably naïve, not to say ignorant, about the fundamental workings of an economy, where human beings have to divide limited resources and are not able to simply create resources with paper alone. One should not be so surprised by such naiveté. Taking into consideration the mechanics of the North Korean state, such a decision had to be initiated (or at least personally approved) by Kim Jong Il himself. The North Korean ruler has never in his life had to worry about paying for groceries or saving for a new car (let alone for a rainy day). Kim Jong Il was indeed a brilliant power broker and a world-class diplomatic manipulator, but he had a reputation for being almost comically incompetent in matters of economic management—and the 2009 reform confirmed this widespread opinion.
One can easily imagine how the Dear Leader would look through a currency reform plan and say: “And what about poor wage-earners? Should we not reward the people who remained loyal to the socialist industry and did not go for black markets? Why not increase their salaries, so they will become affluent, more affluent than those anti-socialist profiteers of the black market?” One would imagine that few, if any, officials would dare to explain the dire economic consequences of such generosity to the Dear Leader.
From the first hours, the currency reforms took a very messy turn indeed. People rushed to save their earnings and savings, and panic buying ensued. In a sense, this was expected to happen, but the scale of panic was unusual. To placate the situation, the authorities adjusted the rules, increasing the maximum exchange limits, but this did not help. Unfortunately, further actions merely exacerbated the crisis.
The authorities obviously supposed that the PDS would start functioning immediately, delivering the rations to the masses, but this did not (and could not) happen. As one would expect, inflation began to speed up. For a while the government kept issuing restrictions on the maximum market price for essential goods—for example, rice should not be sold for more than 24 won per kilo. The market ignored these regulations. In rare cases when the regulations were enforced by police, nobody was going to sell at the price that was well below the market equilibrium, so goods disappeared. In an attempt to rein in the chaos (and, perhaps, to “punish” the stubborn merchants and vendors), the regime closed all markets in December. In early January 2010, hard currency shops, where the elite and new rich could buy quality goods, were closed as well. This latter decision delivered a blow to the highly privileged groups of the population. In January it did not necessarily help to be an army general, a spy master, or a successful antiques dealer—even these people would have trouble getting daily food for their families.
For a brief while in January and February 2010, a major outbreak of public discontent seemed to be within the limits of the possible. The dissatisfaction was expressed with unprecedented frankness. It was the first time in decades even highly privileged members of the Pyongyang elite openly
criticized their government’s actions when talking to foreigners. Russian students in Pyongyang were approached by their classmates who did not bother to hide their anger about the currency reform, and North Korean diplomats sometimes made pointed comments to their foreign opposite numbers. A military attaché of one Western country (not exactly friendly from the North Korean point of view) told me that his opposite numbers related that the North Korean government “doesn’t quite understand what it’s doing.” One can imagine how angry a military intelligence officer in one of the world’s most controlled societies has to be in order to share his frustration with an imperialist outsider.
It is not coincidental that around this time rumors about the impending collapse of North Korea began to spread. To an extent these rumors were probably circulated by South Korean conservatives then in control in Seoul, but the sense of insecurity was briefly shared by many people who had firsthand access to Pyongyang (not least by the Chinese whose unease was palpable in those days).
But nothing serious happened. By April, it was business as usual (almost). Foreign currency shops and private markets were reopened in February, the rich and powerful stopped complaining, and the humbler folks resumed their usual economic activities, which lay well outside the shrinking government-controlled sphere.
In the aftermath of the reform fiasco, the government withdrew all restrictions that had been introduced in the 2005–2009 antimarket campaigns. The local authorities were explicitly ordered in May 2010 not to intervene with the daily working of markets—as long as politically dangerous items, like South Korean DVDs, were not on sale. It was again unofficially permitted to sell grain at the market price, and traders regardless of age or gender were allowed to conduct business much as they liked. Obviously, the government again implicitly admitted that North Korea in its present shape could not exist without active markets—its hyper-Stalinist rhetoric notwithstanding.
There were talks that the North Korean premier, soon to be ousted from his job, apologized for “mistakes” when talking behind closed doors to a gathering of officials in Pyongyang. There were also widespread rumors
that Pak Nam-gi (a high-level KWP official, responsible for economic policy) was executed for his “counter revolutionary activities and espionage.” Allegedly, the old bureaucrat was accused of being a lifelong American spy who deliberately mishandled the reform in order to inflict damage to the North Korean economy. Both rumors were widely reported in the international media, and might be true indeed, but one should keep in mind that neither was confirmed by North Korean official sources.
There is nothing surprising about this silence. However strange it might appear to a reader, the entire issue of the currency reform was
never
mentioned in the open-access North Korean media. When the entire country was in an unprecedented state of chaos, not a single article in the official newspapers even mentioned what was going on. All information and instructions reached the North Korean populace through classified channels: notices were put on the boards at the banks, markets, and shops, and announcements were occasionally made over cable radio whose programming could not be heard by outsiders (and often differed from one neighborhood to another). References to the currency reform in the official media could be found only in the types of media that are inaccessible to the average North Korean and exclusively target a foreign audience—like, for instance, the pro-North newspaper in Japan (
Choson Shinbo
).
The government succeeded in getting the political situation under control, but it could not do much about the law of supply and demand. Thus, a tidal wave of inflation rose immediately after the reform—and what else would one expect after an effective 10,000 percent overnight increase in all wages and salaries? Within a few months, the four-digit inflation wiped out whatever little gains state employees had received from the entire operation. By late 2010 the price of food and consumption goods stabilized at roughly the same level as before the currency reform (which could have been predicted by anyone who ever took Economics 101).
In essence, the bold attempt to deny the law of supply and demand ended pretty much like a challenge to the law of gravity would. It remains to be seen, however, whether North Korean leaders have learned their lesson. The level of economic ignorance they have demonstrated in 2009 makes one suspect that the Kim family (and, perhaps, many of their top
advisers) cannot grasp even the basic mechanisms that govern a functioning economic system. Admittedly, this ignorance about modern economics does not prevent them from being shrewd politicians who recognize what they need to do in order to stay in power. They know how to maintain a world where they and their families will have no need to worry about such mundane matters as paying their bills.
Nevertheless, it is possible that the North Korean leaders have learned a thing or two from their dangerous encounter with the world of the market economy. Beginning in May 2010 attempts to reverse the marketization were abruptly stopped, and for the following years the markets were left alone. In essence, the government, burned by their 2009 failure, returned to the policy of the late 1990s: while markets are not endorsed, they are for all practical purposes tolerated.
Since the early 1970s North Korea has been a family dictatorship, an absolute monarchy in everything but name. Consequently, it was almost universally expected that in order to maintain the stability of the Kim family regime, Kim Jong Il would eventually anoint one of his sons as successor. Rumors about a coming succession have widely circulated in the media since the mid-1990s. International media outlets occasionally run stories where, whilst citing “well-informed sources” inside North Korea, they claimed that Kim Jong Il had “just made a decision” about the succession.