http://www.businessweek.com/stories/2009-12-01/north-korea-takes-aim-at-the-black-marketbusinessweek-business-news-stock-market-and-financial-advice

Global Economics

North Korea Takes Aim at the Black Market


Just days before a visit by Obama's special envoy, Pyongyang is issuing new bank notes to reassert control over the economy

For most of the decade, North Koreans fed up with the regime's economic policies have been voting with their wallets, shunning the government's official stores and instead shopping in free markets launched in 2002. In a rare attempt at economic reform, Pyongyang deregulated prices and introduced street and farmers' markets, allowing citizens to acquire food and daily necessities from the markets as the government reduced supply of rations. North Korean shoppers embraced those markets—as well as black markets that developed at the same time. Today, many North Koreans depend on the underground economy to buy not only basics like food but increasingly consumer electronics and even videos of South Korean soap operas. Despite efforts by the regime in 2006 to crack down on the black markets, they've continued to grow—and have become a emblem of failure for Kim Jong Il's government. Now the regime is fighting back. According to reports in South Korea's media, North Korea on Nov. 30 redenominated its currency, issuing new notes that lop off two zeros from the nominal value of the North Korean won. In a move aimed directly at the underground economy, the government has also set a ceiling for the amount of old notes its citizens can exchange into new ones. Since so many people involved in the black market stash their money under their mattresses rather than in the government-run banks, that limit will suddenly wipe out the savings of millions of North Koreans. Rush to Exchange

With the government imposing such draconian new policies limiting the amount people can exchange, many shops in Pyongyang were shuttered, South Korea's Yonhap news agency (citing Chinese officials) reported. The agency also reported a rush of North Koreans desperately trying to change their currency into Chinese yuan or U.S. dollars on the black market. The new policy "is a radical move aimed at transferring wealth from the private sector to the official sector," says Park Hyeong Jung, a North Korea specialist at Korea Institute for National Unification, a state-funded think tank in Seoul. The currency move comes as the North Korean government is feeling especially vulnerable. Kim's health is questionable, and the leader is trying to fast-track the grooming of his youngest son, Kim Jong Un, to be his successor. Negotiations with the U.S. over Pyongyang's nuclear program are also at a delicate stage, with American special envoy Stephen Bosworth due to visit North Korea for talks on Dec. 8. By cracking down now on the underground economy, just days before the visit by President Obama's representative, the regime seems to be sending a signal that it is most concerned about maintaining its grip over the country and ensuring its own survival. How effective will the new policy be? In the short term, it will considerably reduce trading in the underground economy, according to North Korean watchers in the South. The limit on the amount of old currency people can exchange into new currency will destroy considerable amount of wealth held by households, but it's in line with recent campaigns forcing North Koreans to meet production targets set at government-run factories and farms, thereby boosting activities in the official sector. North Korean watchers in Seoul are not sure if Pyongyang's currency redenomination will work as intended by its ruling elites. Although it is not clear exactly how much in new notes North Korean citizens are allowed to have—some reports say 1,000 won and others say 1,500 won—there appears to be a certain limit. Still, there's little doubt that the regime is feeling jittery and is backtracking from the limited reforms it had allowed as inflation picked up and the government began losing control. "The measure underlines North Korean leadership's determination to tighten its grip on the economy," says Dong Yong Seung, who monitors North Korea at Samsung Economic Research Institute, a think tank aligned with Samsung Group. Outside Aid Needed

The problem with North Korea is that it has no resources to make the economy work. To boost its official sector, the government must increase rations to citizens and supply of oil and raw materials to factories. The North, however, has relied on outside food aids to feed millions of its people since the mid-1990s, when the country was hit by floods just as trade at "friendly prices" with the former Soviet Union collapsed. To secure oil and other supplies, North Korea either needs help from China or the West. That won't be easy unless Pyongyang gives up its nuclear ambition. South Korea's stock market took the latest news from the North in stride. The market did drop sharply in early trading, but that was largely in response to speculation that North Korean leader Kim Jong Il had died. Korean shares soon recovered as investors realized there was nothing to the rumor.

Moon is BusinessWeek's Seoul bureau chief.

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