Much ado was made this week about North Korea revaluing its currency. The story first caught my eye as a headline on Twitter and, given the near lack of an economy up north I didn’t think much of it, but my curiosity heightened when I saw the Korea Times and the New York Times pick it up. Our stalinist neighbor announced this week that it would drop two zeros from its currency, issue new bills, and limit the amount of the old bills that could be exchanged.
Unsurprisingly, the change was met with harsh criticism. The Wall Street Journal’s Marcus Noland called Pyongyang’s bluff saying it was a decision made not out of sound economic policy, but “yet another stratagem by the central authorities to short-circuit the development of an entrepreneurial class independent of the state.” Other news agencies cited a widespread, chaotic reaction from within the secretive state’s borders.
The problem is not so much the revaluation itself, it is a strategy used by many stable governments to halt bad economic policies of the past and fight runaway inflation. By revaluing the currency “at approximate parity to major currencies such as the dollar or the euro,” the strategy is often used as a tool for citizens to hold their government accountable for their country’s economic performance. That is clearly not what is happening in North Korea. Holding the government accountable for anything is the last thing the North wants its people doing, and instead this was intended to snuff out small, underground entrepreneurs, and preventing people from holding any savings. Noland writes:
Unlike a Turkish or Ghanaian-style reform [two countries who recently revalued their currencies], 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.
Other sources like the New York Times also commented on the conversion limit as a fault of the program. The government initially only allowed 100,000 ($690, officially, $35 on the black market) to 150,000 won to be exchanged into the new bills, a rule that would “effectively decimate private stores of cash wealth in local currency.” Following this decree several news outlets reported protests in the streets of Pyongyang, and chaos in the public transportation systems as people flocked home and then to their banks in attempt to redeem their new bills, and sell off the rest into something else.
In response to the protests, the North made a reluctant and disingenuous compromise. All citizens are now allowed to exchange all of their savings for the new notes, but the exchange rate will change after the first 100,000 won. According to Daily NK:
“The maximum amount per household which could be exchanged in cash was initially set at 100,000 won, but overnight it increased to 150,000 won, then subsequently a new decree was handed down.”
“According to the new decree, the exchange rate is still 100:1 for 100,000 won, but now the authorities will only permit people to exchange the rest of the money at 1,000:1.”
As a result, if you take 200,000 won in cash to a bank, you get 1,100 won in new denomination bills. This emergency formula will do nothing other than destroy the fortunes of the people. [Quotations taken from NK Daily's source.]
The overwhelming verdict among news agencies across the world is that the North’s currency valuation scheme is targeted at two things: obliterating any kind of personal wealth, no matter how small, and shutting down any kind of entrepreneurial activity, black market or otherwise. In addition, the South Korean Unification Ministry has yet to issue an official statement on the subject because it is waiting for Pyongyang to first officially announce the unexpected economic activity.
The blog North Korean Economy Watch has a great collection of quotations from and links to international publications covering the revaluation scheme.