North Korea’s currency reforms

A couple of excellent articles here and here on the BBC website on North Korea’s complex battle between free markets and centrally planned allocation of resources.

This particular issue focuses on currency reforms. The main points are:

- 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.
- Currency reforms are usually undertaken by governments in an attempt to re-stabilise an economy. They are common after a significant period of inflation (Zimbabwe did this last year, by adopting the US$) to try to gain credibility of macroeconomic policies. An alternative method is to simply remove the plethora of zeros at the end of the value of their currency to stabilise prices (again, as Zimbabwe did last year).
- In Dec 2009, the North Korean government decided to implement some currency reforms. The government told its people that it was knocking two noughts off the nominal value of banknotes; to help tackle inflation and increase officials’ control over an already impoverished population.
- However, in North Korea’s case the policy was implemented suddenly and with extreme: 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, an old 1,000 North Korean won note will now be worth just 10 won). But the limit would not buy much more than a 50kg sack of rice at prevailing retail prices.
- This had the immediate effect of destroying the value of savings of both households and entrepreneurs.
- There also appears to be a limit on how much can be exchanged - one report says each adult can cash in only 100,000 won - which means any savings beyond this are literally worthless.
- Unsurprisingly, the announcement set off panic buying as consumers rushed to dump the soon-to-be-worthless old currency, buying foreign exchange or any physical good that would act as a store of value.
- As the value of the North Korean won collapsed on the black market, the government issued further bans on the use of foreign currency, establishing official prices for goods, and limiting the hours of markets and products that could be legally traded.
- Given the outcry, the government was forced to back-peddle, offering compensatory wage increases, sometimes paying workers at the old wage rates in the new currency, amounting to a 100-fold increase in money income.
- The result has been a literal disintegration of the market, as traders, intimidated by the changing rules of the game, withheld supply, reportedly forcing some citizens to resort to barter.

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