Posted: December 3, 2009

Background

On Nov. 30, the North Korean government redenominated the country's currency, the won, and imposed restrictions on the quantity of old bills that people could convert for the new ones. Pyongyang's redenomination means that 100 won is now worth 1 won. This sudden government action raises many questions about the impact of the redenomination on the North Korean people and the regime.

• What are the main explanations among North Korea watchers regarding the Democratic People's Republic of Korea (DPRK) government's rationale for implementing this redenomination?
• How will this redenomination impact the DPRK people?
• How will this redenomination impact the DPRK regime?
• What is your net assessment of this move?

What are the main explanations among North Korea watchers regarding the Democratic People's Republic of Korea (DPRK) government's rationale for implementing this redenomination?

An early explanation was that the DPRK government was seeking to curb inflation by knocking off two zeros from the currency. A more compelling explanation is that the redenomination is a major measure designed to consolidate the government's control over the economy as it works towards unveiling the DPRK as a "strong and prosperous nation" (kangsong daeguk) in 2012. Defectors had noted that the market activity sprouting out over key parts of the country had been eroding discipline -- corruption among officials had been increasing significantly, fueled by a growing group of prosperous market traders. This trend had the effect of decentralizing the DPRK regime's power. Through this currency measure, the regime appears to be seeking to centralize and consolidate its power again.

How will this redenomination impact the DPRK people?

Initial reports indicate that North Koreans who profited from market activity had rushed to convert their North Korean won holdings into Chinese yuan and U.S. dollars after hearing about the redenomination. Since the early 2000s, these market traders have been significantly expanding market activity in North Korea. Female traders in the sprouting markets were the ones who were reported to have staged effective protests against DPRK officials when new regulations were implemented restricting their access to these markets to sell goods.  Female traders may be at the forefront of protests again as the opportunity to convert North Korean won to other currencies passes. Those who are not able to convert their won-denominated savings will lose a great deal of value.

Perhaps the most significant impact will be the decline of human security in North Korea. In recent years, as people were able to make more money in the markets, they could bribe their way out of trouble with the authorities as long as they did not commit a political crime against the regime. They were also able to pay bribes to get relatives out of trouble.  The redenomination will severely scale down this practice.

How will this redenomination impact the DPRK regime?

As North Korean people in key market-active regions benefited from growing commercial interactions, low- to high-level DPRK officials figured out ways to get a cut of the money made. These officials used most of these bribes (viewed by traders as a "cost of doing business") to line their own pockets, but also used a portion of these for their respective organization's operating budget. With less to skim from the markets due to this redenomination, these officials will have funding gaps to fill. Given that these officials also enjoyed a higher standard of living, the discontent of the North Korean people will be aligned with these "skimming" officials. New groups of losers from this redenomination may be more advanced and better organized than protesters during previous periods of government-initiated economic and currency reforms.

If the formal and non-formal markets are not able to adjust, this essential coping mechanism for the people may cease to move goods (particularly food products) around the country. Barter trading may help somewhat in the interim, but due to an overall scarcity of goods, bartering may place greater strains on this widespread market activity. The DPRK government is likely to encounter growing criminal activity as people turn to other means as markets seize up during a period of adjustment.

What is your net assessment of this move?

If the DPRK government had improved and restored the inconsistent Public Distribution System and other public services on a national basis (a massive undertaking), a redenomination may have triggered greater state control by minimizing the benefits from the non-formal market system and making the North Korean people dependent on the state again. It does not appear that the DPRK government has improved these national systems. In an apparent effort to restore discipline through this redenomination, the DPRK government may have initiated a period of economic, social, and political destabilization by undermining a widely used coping mechanism for the people, as well as a growing number of officials.

The North Korean regime is well-known for "muddling through" crises. Should this redenomination lead to another major food crisis, the primary difference to earlier crises is that the people were dependent on the state then. Many suffered and died quietly in the late 1990s. Having benefited from market activity in the form of higher material living standards and improved human security, North Koreans are unlikely to suffer quietly this time round. However, since the North Korean regime still retains "a monopoly on violence," there will be limits to the means used by the North Korean people to protest. A key question this time is how officials will seek new sources of bribes. Now that more diverse groups in North Korea have enjoyed the benefits of market activity, an evolutionary process of developing more creative ways to continue market practices has been unleashed. As this market organism adapts and mutates, the regime's traditional economic sticks will become less effective over time.