In my previous article for PolicyMic, I opened this series on North Korea with a discussion on the Kaesong Industrial Zone and the economic significance it has for the viability of the North Korean economy. In this piece, I will continue with an overview of North Korea’s monetary policy and the challenges of managing currency in a command socialist economy, with a brief comparison of the currency management in the former Eastern bloc countries to better highlight these challenges. Going forward, however, North Korea may not be able to cope with a world that operates on money without some considerable changes to its own monetary policies.
First, money by itself is used as a universal medium of exchange to streamline the transaction of goods and also to store value as a benchmark to measure how much a good or service costs relative to another, or alternatively, to the labour of an individual.
North Korea’s governing ideology is a strange marriage of communism, hereditary monarchy and juche, the local flavour for national strength through self-reliance, all wrapped up in a nationalist fervour built around the deified personality cults of what are, in the end, mortal men. In this context, the function of money is severely limited, as contrasted against how capital functions in a less regulated setting, where market trends are still faced with, but not overwhelmingly controlled by political controls. It is due to the influence of communist ideology, whose ideal omits money entirely.
Within the North Korean economic model, monetary policy is subject to political decrees and guided by their stipulations rather than currency market logic. While North Korea comes close to minimizing the need for money, as housing is free and food distribution is done through a coupon system, it is the fact that North Korea cannot escape dealing with the outside world through trade relations and investment that makes the money problem rather more troublesome than the ideology would suggest.
Inflation is one of North Korea’s most under-reported problems, because of its poor agricultural system and reliance on food imports, the prices of basic foodstuffs vary with global supply and demand trends. Further, the scarcity of food in North Korea, resulting in a massive famine in the 1990s and persisting food shortages in the 21st century, further drive agricultural and produce prices in the country to higher levels. It is one law of supply and demand that Pyongyang cannot escape.
Conversely, the domestic monetary policy represses inflation through keeping wages and incomes low and fixed rather than allowing them to rise naturally and vary with inflation. In a way, this policy wells up inflation behind an administrative dam that not only undermines the stability of the won (the North Korean currency), but also sets ticking a hyperinflation time bomb. One sure sign of how inflation moves in North Korea is to watch the escalating value of the won against the U.S. dollar.
The second main problem to Pyongyang’s currency practices is that international trade happens in dollars, yuan, but not won. Parallel to the meagre formal economy there is an informal sector where people begin to transact with currencies other than the won, given that the latter is not only sorely uncompetitive as a currency, but it has no logical bearing on the market trends operating on and around North Korea. In response, the central government has resorted to applying legal measures to default to the use of the won and outlawing the use of foreign currencies. It is, however, a short-term solution as the inflation problem will not go away.
A third issue comes up when we consider that hard currency, it being dollars for example, represent a very lucrative asset for Kim Jong-un’s government, because owning hard currency makes trade and investment easier – however, with the political catch that the clique around Kim is the one controlling the flow of transactions in and out of North Korea.
The overall picture is similar to the socialist states in the Eastern bloc in the 1980s: highly ineffective economies, where the allocation of resources and labor was also governed by government decrees and logically, misaligned with the natural market forces operating in that context. Currencies were also depressed and controlled through administratively suppressive measures to keep wages and prices low. The result was that when the political structures propping up these arrangements collapsed, it became overwhelmingly clear that economies that could not compete outside the political cocoon in which they existed, along with deformed currencies that exploded in hyperinflation around the former Soviet space and sphere of influence, indicated a valuable lesson that monetary policies should have moderating effects, but never should attempt to control the overarching market trends, as the results are disastrous.
North Korea is learning that juche remains a pleasant fiction in some higher-echelon circles, along with that does not have the political, economic and social structure to be ever truly isolated and independent from the surrounding world. Accepting economic reality sooner means that there is less of a chance it will come crashing through the front door later, and North Korea would be wise to heed that warning.
The next article in the series is going to cover North Korea's fiscal policies.