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North Korea: From Hyperinflation to Dollarization?

June 17, 2013 in Economics

By Steve H. Hanke

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Steve H. Hanke

For years, North Korea has been crushed by a communist command economy, producing little besides mass starvation. More recently, the plight of North Korea’s economy has been exacerbated by harsh, foreign economic sanctions — which only seem to have driven the regime to double down on its nuclear ambitions.

Following North Korean supreme leader Kim Jong-il’s death in December 2011, many around the world had high hopes that his successor (and son), Kim Jong-un, would launch economic and political reforms. Unfortunately, in the year and a half since he assumed power, the new supreme leader has not delivered on his advertised economic reforms,and misery continues to grip all but those in North Korea’s communist ruling class.During the past few months, North Korea has been the subject of out sized news coverage. The recent pea cocking by the Supreme Leader — from domestic martial law policies to tests of the country’s nuclear weapons capabilities — has successfully distracted the media from North Korea’s economic woes.

Indeed, behind the saber-rattling, the missile tests, and the basketball games with Dennis Rodman, is an economic story— one with important geopolitical implications, not only for North Korea, but also for China.

North Korea’s Hyperinflation
For years, North Korea’s currency, the won, has been officially pegged to the U.S. dollar. That said, exchange controls and a plethora of associated regulations and harsh penalties have rendered the won in convertible. This, of course, has given rise to a healthy black market for foreign currency. North Korea’s monetary dysfunction has been accompanied by severe inflation problems.

In 2009, the North Korean government attempted to address these problems by implementing a phony currency”reform” program, which it promptly bungled. The so-called reform was actually just a currency redenomination program,which arbitrarily lopped two zeros off 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 old 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 program,too.

It should come as little surprise that Pyongyang’s bungled currency reform sparked a panic in North Korea’s primitive,underground markets for goods and services. The price of rice, for example, promptly skyrocketed during this period (see the accompanying chart).

These markets, which developed out of necessity during the famine of the 1990s, primarily …read more

Source: OP-EDS

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