N. Korean currency crackdown fuels inflation, food shortages

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By Blaine Harden
Washington Post Foreign Service
Thursday, January 7, 2010; A11

TOKYO -- Strong-armed currency reform in North Korea, which has confiscated the savings of small businesses and forbidden the use of foreign money, is now causing runaway inflation and contributing to food shortages, according to several reports from inside the closed state.

Currency reform is part of an aggressive crackdown on free markets by North Korean leader Kim Jong Il.

His government has ordered the closure by the end of March of a large wholesale market in the northeastern port city of Chongjin, according to Good Friends, a Seoul-based aid group with a network of informants inside the country. Another major wholesale market near the capital, Pyongyang, was shut down in June.

After a decade of explosive growth, markets have substantially supplanted the central government as a means of employing and distributing food to North Korea's 23.5 million people. The kudzu-like spread of grass-roots capitalism -- and the government's inability to control it -- has angered Kim and his top lieutenants.

To hobble traders who acquire goods from neighboring China, the government has imposed controls on travel and lodging in border areas, ordered the public not to use the large suitcases that are popular with traders and increased punishment for illegal border crossing.

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North Korea is "not moving toward a free-market economy, but will further strengthen the principle and order of social economic management," an official of the North Korean central bank recently told the Choson Sinbo, a Tokyo-based newspaper that is a mouthpiece for Kim's government.

But reining in the markets is a formidable task, even for North Korean authorities, who preside over what is often described as the world's most repressive police state. United Nations officials estimate that half the calories consumed in North Korea now come from food bought in private markets. Recent surveys of defectors have found that as many as 75 percent of them were involved in market activities before fleeing the country.

At the end of 2009, North Korea moved suddenly to wipe out the wealth of all those who had profited from market trading. It revalued the local currency, the won, while sharply restricting the amount of old won that could be traded for new. The rules, as first announced, made it illegal for citizens to possess more than $40 worth of local currency.

The revaluation triggered widespread anger and rare public protests. The government, as a result, eased exchange limits and increased cash payments to farmers and some workers, according to several accounts from inside the country.

Besides penalizing traders, an apparent goal of the currency revaluation was to slow inflation, which has plagued North Korea for years. But the government's action appears to have backfired, with potentially disastrous consequences in a country that is chronically short of food.

The black-market value of "new" won has reportedly plummeted against Chinese currency, spooking private traders, who have pulled their goods out of markets. Outside economists say suspicion about the value of the won has made residents wary, increasing economic stagnation and worsening food shortages.

The central government held a teleconference in late December with officials in every province, city and county "to discuss how to supply consumer goods to residents in the aftermath of the currency exchange," according to Good Friends.

At year's end, the government also announced a ban on the use of foreign currency. The North's richest private traders kept their savings in foreign currency and used it to import Chinese and South Korean goods for sale in North Korean markets.

But euros, dollars and Chinese yuan are also the preferred currency of the North Korean elite, who used them at state shops to buy luxury goods unavailable to most of the population. The survival of Kim's government, many analysts say, depends on catering to the needs of a few thousand elite officials in government and the military.

The consequences of crimping their lifestyles are difficult to predict, but the South Korean government has expressed concern.

"It is difficult to estimate the threat to us that will arise in the aftermath of the currency reform," South Korean Defense Minister Kim Tae-young said in a year-end message to his country's armed forces.

Uncertainty, inflation and shortages triggered by currency reform come at a time when Kim, now 67 and recovering from a stroke in 2008, is laying the groundwork for a successor.

The rollout of his third son, Kim Jong Eun, 26, as the heir apparent may be gathering momentum, according to the North Korea Intellectuals Society, a defector group in Seoul.

Citing sources inside North Korea, it said that his birthday on Jan. 8 is the subject of a Workers' Party decree calling for a commemoration of Kim Jong Eun as "the other leader of us and our future."

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