Time on North Korea's Great Currency Obliteration of 2009

Relying heavily on analysis by East-West Center researcher Marcus Noland, Time Magazine has published a piece on North Korea's Great Currency Obliteration of 2009. It suggests the impact on the larger market players — who would carry a lot of Chinese yuan, American dollars, and European euros — will be minimal, but small-time marketers may have been dealt a body blow. An excerpt:

In many countries, economic reform can be a good thing. Even draconian changes to the paper currency can help governments draw a line between "bad economic policies of the past, often after taming a hyperinflation," says Marcus Noland, an economist who at Washington's Peterson Institute of International Economics. However, this being North Korea, one of the most repressive and impoverished nations in the world, that's not the case this week. The government announced it would limit the amount an individual can exchange to just 100,000 won — or less than $40 at black market exchange rates — and any amount above that threshold would be, in effect, worthless. NGOs in Seoul reported that in response to citizens' immediate and widespread anger, those limits were raised to 150,000 won in cash and 500,000 won in bank notes.

That, apparently, did little to quell the discontent, and for good reason: Since the famine in North Korea a decade ago, informal private markets have sprung up across the country, enabling an increasing number of North Koreans to feed themselves and earn a basic living by trading. The UN has estimated that about half the calories consumed in North Korea come from food purchased at private markets. Under the new plan, however, the small savers who run those private markets will be stripped of much of the cash they need to run their business.

So why would Pyongyang make such a change? As usual, parsing the reasons the North Korean government does anything is murky business. But Pyongyang watchers in Seoul believe the crackdown comes for two main reasons: first, there was a widening gap between the haves and the have-nots in North Korea, partly due to the prevelance of relatively free markets, says Cheong Seong-chang, senior fellow at the Sejong Institute, a think tank in Seoul. Since 2000, the bigger traders in North Korea have come to live a life "almost as lavish as South Koreans," says Cheong. "They have big refrigerators, color televisions, DVD players." In a socialist utopia like North Korea, such economic divides are unacceptable; the currency change would reduce inequality by making a broad swathe of the north korean population poorer.

But these imbalances will continue to persist, say analysts and North Korean defectors in Seoul. The largest and wealthiest of North Korea's traders, including government-owned companies, have long since swapped out of North Korean won and instead hold Chinese renminbi, yen or dollars as a store of value. The black market value of the won has been decreasing for years, and North Korean inflation has been accelerating. The former head of a large North Korean trading firm, who recently defected to Seoul, told TIME: "Some kind of move like this was expected for a long time." And, he says, it won't have any impact on bigger companies and traders. Instead, the move punishes a broad swathe of people in North Korea who have been able to amass a small amount of savings by engaging in black market trading.

If I'm right about the impact this will have — it may have effectively turned many thousands of people against the regime whereas they recently had a stake in its continued survival — it makes little difference that the big trader remained protected. In fact, if they use their currency holdings as a means to jack up prices, it will only cause greater suffering and disgruntlement.