North Korea replaced its practically worthless currency at a rate of 100:1 on Tuesday. The North's last currency reform was 17 years ago, when it replaced old won with new at a rate of 1:1. The announcement sent North Koreans scurrying to exchange their won into U.S. dollars or Chinese yuan.
The reform appears to be aimed at suppressing soaring inflation. The communist country implemented partial market reforms back in 2002 that resulted in rising in prices of food, manufactured goods, homes and electricity fees, while wages increased 18 to 25 times. The North also adopted a system of incentives in proportion to labor productivity to overcome shortages in food and daily necessities.
Money supply rose as a result, but shortages in energy and raw materials compounded by an ailing infrastructure and other structural limitations interfered with supplies of food and daily necessities leading to skyrocketing consumer prices. Inflation has grown so bad recently that a 2 kg bag of corn is worth a month's wage. North Korea's central bank is virtually useless since it is incapable of implementing monetary policies and has no way of mopping up excess liquidity in the markets. That is why the North Korean government has virtually confiscated cash from its citizens by replacing the currency.
Some experts say the currency reform resembles the market-opening steps taken by Vietnam. From 1979 to 1981, Vietnam implemented similar steps to raise wages and the prices of goods to levels seen in capitalist countries and then replaced the currency at a ratio of 10 to 1. If North Korea is to overcome its economic difficulties, it has no choice but to pursue market reforms by liberalizing prices just like Vietnam.
Others, however, say the intention is to strengthen the planned, socialist-style economy by getting rid of economic imbalances created after private farmers'markets mushroomed and widened the gap between rich and poor. Since April, North Korea has been rounding up citizens and sending them to communal farms to take part in state efforts to boost production and revive the economy. But the real intention, experts say, is to bolster the regime's control of the public.
Regardless of the intentions, the North must boost the supply of goods to succeed in its currency reform, and that is possible only through economic cooperation and support from South Korea, the U.S., China and other countries. That means there is a strong possibility that North Korea will take a more accommodating stance in talks with Seoul and Washington. If not, the North's economy could get even worse following the currency reform and make living conditions for its people intolerable. One thing is clear: North Korea's economy stands at a crossroads.
