North Korea's eco­nomic cri­sis – what cri­sis?

Financial Nigeria Magazine - - Contents - Au­thored by Steve H. Hanke of the Johns Hop­kins Univer­sity. Fol­low him on Twit­ter @Steve_Hanke.

Much ink has been spilled re­cently about how eco­nomic sanc­tions have crushed the North Korean econ­omy and brought its leader Kim Jong-un to the bar­gain­ing table. Not so fast. For starters, there wasn’t much to crush. Never mind. And, con­trary to re­peated con­jec­tures by ex­perts in international af­fairs, what­ever there is of a North Korean econ­omy ap­pears to be quite sta­ble.

While it is dif­fi­cult to ob­tain de­pend­able eco­nomic data about the Her­mit King­dom, there are re­li­able data on key prices that, when prop­erly in­ter­preted, pro­vide in­sights into the per­for­mance of the econ­omy. The most im­por­tant price in any econ­omy is the freemar­ket ex­change rate be­tween its do­mes­tic cur­rency and the U.S. dol­lar – the world’s re­serve cur­rency. But, is there a free mar­ket for cur­rency in North Korea? Well, yes, there is. North Korea has an ac­tive cur­rency black­mar­ket where re­li­able North Korean won-U.S. dol­lar (KPW/USD) rates are reg­u­larly re­ported. And that’s not all. There is also a black mar­ket for rice – the most im­por­tant sta­ple in North Korea. Black-mar­ket rice prices are reg­u­larly re­ported, too. Armed with these two prices, we can lift the shroud of se­crecy that cov­ers the North Korean econ­omy.

Be­fore Kim Jong-un as­sumed power in 2011, North Korea ex­pe­ri­enced se­vere eco­nomic prob­lems. These in­cluded hy­per­in­fla­tion and famine.

In 2009, the North Korean gov­ern­ment at­tempted to ad­dress run­away in­fla­tion by im­ple­ment­ing a phony cur­rency “re­form” pro­gramme, which it promptly bun­gled. The so-called re­form was ac­tu­ally just a cur­rency re­de­nom­i­na­tion pro­gramme, which arbitrarily lopped two ze­ros off of ev­ery won note. North Kore­ans were given less than two weeks to ex­change all of their won for new notes. And, the gov­ern­ment set lim­its on the quan­tity of won a fam­ily could ex­change for new won. For those North Kore­ans who had saved a few too many won, the re­de­nom­i­na­tion pro­gram was ef­fec­tively a wealth tax pro­gramme.

It should come as lit­tle sur­prise that Py­ongyang’s bun­gled cur­rency re­form sparked a panic in North Korea’s won black-mar­ket and its un­der­ground mar­kets for goods and ser­vices. In­deed, the value of the won against the green­back col­lapsed, and the price of rice sky­rock­eted.

With the plunge of the won, in­fla­tion surged. My stud­ies show that a hy­per­in­fla­tion episode be­gan in De­cem­ber 2009. It was then that the monthly in­fla­tion rate first ex­ceeded the hy­per­in­fla­tion thresh­old of 50% per month. North Korea’s hy­per­in­fla­tion peaked in early March 2010, when the monthly in­fla­tion rate reached 926%.

When Kim Jong-un as­sumed power in 2011, the North Korean econ­omy re­sem­bled a dis­as­ter zone. The new leader immediately pur­sued poli­cies to sta­bi­lize the won, prices, and the econ­omy. Rather than at­tempt another dis­as­trous cur­rency re­form, Kim Jong-un fol­lowed a twopronged approach in the mone­tary sphere. On the one hand, do­mes­tic mone­tary pol­icy was set so that the KPW shad­owed the USD on the black-mar­ket. The KPW/USD ex­change-rate sta­bil­ity be­came North Korea’s un­writ­ten mone­tary pol­icy ob­jec­tive. While on the other hand, what could be termed a pol­icy of be­nign ne­glect was also in­tro­duced. This al­lowed for the spon­ta­neous “dol­lar­iza­tion” of the econ­omy. In con­se­quence, the Chi­nese yuan (CNY) and the green back be­came coins of the realm, re­plac­ing the KPW.

Kim Jong-un also looked the other way as the un­der­ground econ­omy flour­ished. In­deed, he al­lowed large chunks of the econ­omy to spon­ta­neously pri­va­tize them­selves. In ad­di­tion, as the vise of international sanc­tions be­gan to squeeze, the North Korean gov­ern­ment de­vised a va­ri­ety of squeeze- avoid­ance strate­gies.

Kim Jong-un’s ap­proaches of spon­ta­neous “dol­lar­iza­tion” and “pri­va­ti­za­tion” has worked much bet­ter than the press and ex­perts in international af­fairs would have us believe. Just look at the KPW/USD ex­change-rate chart be­low. The most im­por­tant free-mar­ket price in North Korea has been very sta­ble since 2012. Rice prices have also been sta­ble since 2012 (see the chart be­low). This sug­gests that the specter of in­fla­tion doesn’t ap­pear to be haunt­ing over the North Korea.

So, maybe the North Korean econ­omy, which is largely un­der­ground, is more re­silient and in bet­ter health than the press and ex­perts as­sert. If so, Kim Jong-un has more cards to play than the ex­perts think he has.

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