BBC News – Currency reform may unsettle North Korean leadership

North Korea’s unexpected currency reforms destabilised its economy – but are they likely to unsettle the country’s politics as well?

On 30 November 2009 North Korea launched a surprise confiscatory currency reform aimed at cracking down on burgeoning private markets and reviving socialism.

The move predictably set off chaos, and now it appears that the government is in retreat, acquiescing in the reopening of markets.

Now the question is what impact this episode may have for North Korea’s looming leadership transition.

During the 1990s the state found it was no longer able to fulfil its obligations under the old centrally planned system. As a result, the North Korean economy was forced to adopt some free market principles.

Small-scale social units – households, work units, local government offices, and party organs – and even small-scale military units began acting entrepreneurially to survive.

This free-market pressure from below received an enormous push during the famine period of the mid-1990s, when perhaps 600,000-1m people, or roughly 3-5% of the pre-crisis population, died.

The regime is extraordinarily insecure about the domestic political implications of economic change. At times it has acquiesced in ratifying the facts on the ground, while at other times has sought to reverse the process.

The trend over the past five years has been largely negative, and confiscatory currency reform could be interpreted as the latest in a series of moves designed to re-assert state control over the economy.

No warning

…The North Korean case is significantly different from the conventional examples in that the move was sprung on the populace without warning, and most critically, enormous limits were placed on the ability to convert cash holdings.

In effect this wiped out considerable household savings and the working capital of many private entrepreneurs.

Citizens were instructed that they had one week to convert a limited amount of their old currency to the new currency at a rate of 100:1 (that is, one new won would be worth 100 old won).

But the limit would not buy much more than a 50kg sack of rice at prevailing retail prices.

The announcement set off panic buying as people rushed to dump soon-to-be-worthless currency, buying foreign exchange or any physical good that could preserve value.

As the value of the North Korean won collapsed on the black market, the government issued further edicts banning the use of foreign currency, establishing official prices for goods, and limiting the hours of markets and products that could be legally traded.

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