It’s been two years since North Korea carried out a massive currency reform with an aim to curb rising prices and improve the citizens’ lives. But North Korean people are reportedly still suffering from economic difficulties due to the side effects, such as the soaring rice prices and the drastic fall of the value in money. On November 30, 2009, North Korea made its first move in 17 years to enact a currency reform that would devalue its currency at the rate of 100 to 1. At the time, the North Korean authorities explained to the people that the measure was designed to bring inflation under control by withdrawing money circulating in the market and to raise the value of the currency. However, the South Korean government has concluded in a recent report that North Korea’s currency revaluation proved to be a failure in political, economic and social areas. Through the currency reform, the communist state attempted to weaken the role of the market, secure the fund to rebuild the economy and adjust the amount of currency in circulation. But the result was quite opposite to what the authorities had thought, with economic indicators reverting to pre-currency reform levels. Here’s Dr. Dong Yong-seung at the Samsung Economic Research Institute to explain.

To assess the result of a currency reform, we can examine whether its main purpose was accomplished or not. In conclusion, North Korea’s currency revaluation ended in failure. The nation’s central bank exchanged old bills for new ones at the exchange rate of 100 to 1. Two years have passed, but the prices still remain at the pre-reform levels. The exchange rate, too, has returned to the levels two years ago. On top of that, the market is still active, with money circulating in the market. That’s exactly the same scene before the currency reform. It’s fair to say the currency reform was unsuccessful.

In the initial stage of the currency revaluation, supply decreased due to the sudden contraction of the market and the slowing purchasing power reduced the circulation of goods. The Unification Ministry has also assessed that factories and companies, which depended on the market to obtain materials and raise funds, faced increasing difficulties in management. The side effects led to galloping inflation and the difficulty in securing daily necessities. A kilogram of rice cost 20 to 40 won right after the currency reform in 2009 but it skyrocketed to 3,000 won last month. The price is even higher than the pre-reform level of 2,300 won. The currency reform also had a major impact on the exchange rate.

The North Korean authorities estimated in December 2009 that the exchange rate would be set at 30 to 40 won per dollar. But it was later re-set at 100 won per dollar, reflecting the rising prices. The exchange rate continued to rise to stand at 2,000 won per dollar in the middle of 2010 and 4,000 won per dollar as of November this year. The present exchange rate is nearly the same as that of the pre-reform levels or even higher. As a result, North Korean citizens tend to secure more foreign currency for fear of a steep depreciation of the local currency.

North Korea’s currency reform wasn’t entirely unproductive, though. Some experts say it was effective in some way in keeping the emerging wealthy class in check. But the nation never fulfilled its initial goal of controlling the market.

The currency reform dealt a severe blow to the new emerging class that accumulated wealth through the market, including Chinese people doing business in North Korea and those engaging in transactions with China using the North Korean currency. But the real problem was that the authorities attempted to suppress free market activities, and in that process, everyday life of North Korean people was nearly paralyzed. As a result, the former premier apologized to village chiefs in Pyongyang and allowed the market again. The North tried to normalize the state-controlled economy by abolishing the market, only to tolerate and permit it, further increasing public dependence on the market.

As the reform resulted in negative effects, the North Korean government rolled up its sleeves to work out countermeasures. It reopened the market several months after the reform and fully approved the use of foreign currency. The nation reportedly executed the officials in charge of the currency reform, including director of the Workers’ Party’s Planning and Finance Department Pak Nam-gi. Yet, North Korea is still reeling from the aftermath of the failed reform. Dr. Dong says the botched reform is attributable to the basic problems of the North’s economic system.

As the reform resulted in negative effects, the North Korean government rolled up its sleeves to work out countermeasures. It reopened the market several months after the reform and fully approved the use of foreign currency. The nation reportedly executed the officials in charge of the currency reform, including director of the Workers’ Party’s Planning and Finance Department Pak Nam-gi. Yet, North Korea is still reeling from the aftermath of the failed reform. Dr. Dong says the botched reform is attributable to the basic problems of the North’s economic system.

Nevertheless, North Korea has given a positive assessment of its currency reform. A North Korean economist claimed in an interview with a foreign media agency that the local economy restored stability without major disruption after the currency reform. The president of North Korea’s investment firm, Daepung Group, also stresses that the nation will find ways to reform the local economy through social infrastructure in the next four years, following the currency reform. But Dr. Dong says it’s hard to expect North Korea’s economic revival since the conditions for normalizing the planned economy are not developed in the nation and there is great discontent among the general public, which distrusts state policies.

img src=https://worldimg.kbs.co.kr/src/images/oth_tnt/dot01.gif align="absmiddle"> For now, North Korea is likely to focus more on boasting economic achievements outwardly, like construction of new buildings in Pyongyang, than actually reviving its economy. With limited financial resources, excessive focus on the development of Pyongyang could devastate the already impoverished regional economies and therefore deepen economic polarization between the capital and provincial areas.

Following the currency reform, experts predict that it won’t be easy for North Korea to revitalize its ailing economy for the mid- and long-term. Pyongyang has declared 2012 as the year of ushering in a strong and prosperous nation. It remains to be seen where North Korea will be heading in order to make a stable reform and successfully rebuild its economy.


[Interview] Research Institute Dedicated to Studies of N. Korea’s Infrastructure
Seoul National University has recently opened a research institute to study infrastructure of North Korea as part of efforts to prepare in advance for the reunification of Korea. The university’s college of engineering held a ceremony marking the opening of the “Infra Center for Unified Korean Peninsula” at the Engineer House on November 21. The ceremony was attended by a number of government officials and scholars as well as technical experts, including Kim Yun-gyu, former vice president of Hyundai Asan, who gave a presentation on the infrastructure of North Korea and shared his personal experience of doing business with North Korea. Director of the new center, Ahn Geon-hyeok, who also serves as the professor of the Department of Civil & Environmental Engineering at Seoul National University, talks about the significance of the new research institute.

It is a research institute dedicated to professional studies on construction of infrastructure, which has to do with the college of engineering. It is uncertain when unification of Korea will come about, with tension still lingering between South and North Korea. But I think the two Koreas will inevitably expand bilateral cooperation programs some day. There are concerns that an abrupt unification of Korea may cause many troubles and entail huge costs. We launched this research center in an effort to come up with ways to reduce the potential unification costs and some sort of cultural shock that unification could bring about.

Many are wondering why the institute was installed within the college of engineering rather than at the departments related to North Korean studies.

The Institute for Peace and Unification Studies at Seoul National University has been committed to unification-related research, mostly on social, political and economic issues. But what the college of engineering is hoping to do is a little different. The most significant part of the so-called unification cost is construction of infrastructure, such as roads, railways, ports, airports and development of cities and houses. Most unification costs involve this area, and it is the college of engineering that is most closely connected with infrastructure. On top of building infrastructure, departments at the college of engineering deal with electricity, energy, resources and chemistry. That is why this infra research center was created at the college of engineering.

The research center will focus on North Korea’s energy, resources, housing and environment, as well as its urban infrastructure. It also plans to hire outside researchers and foster specialists. Professor Ahn stresses that the research will help narrow the gap between South and North Korea and minimize confusion and burden in the post-unification process. So then, what is North Korea’s infrastructure like?

The energy situation in North Korea is quite serious. More research is needed, but a shortage of electricity and insufficient roads are some of the most urgent problems. An inadequate supply of petroleum is also a big problem. It is necessary to use byproducts of petroleum when paving roads, with the exception of concrete roads. Overall, North Korea has very poor infrastructure.

Many state-run think tanks have conducted research on infrastructure related to North Korea and unification, but much of the research hasn’t been revealed or has been deemed useless due to the political situation, which is vulnerable to sensitive inter-Korean relations. Unlike the existing institutes, this private research center will provide a venue for discussing the infrastructure issue in public. It is also considering exchanges with universities in North Korea.

I think the research center will be able to carry out joint projects with North Korea more easily at the private level—something the government finds difficult to push for. We can open our research to the public as much as we want and allow for verification of the research. We’re also ready to listen to the opinions of other experts. In this respect, I believe we can conduct research in an effective way. We’ll also closely cooperate with the government to develop relevant policies, while doing research jointly with private companies that can actually develop and implement technologies.

Professor Ahn says that not only are research efforts important in preparing for the era of unification, but also public interest. The institute has gotten off to a promising start. Here’s hoping that its research results will contribute to laying the foundation for the future reunification of Korea.