The Asia-Pacific Journal | Japan Focus Volume 8 | Issue 8 | Number 2 | Article ID 3307 | Feb 22, 2010

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Money in Socialist Economies: The Case of North Korea　社会主義経済における貨幣−−北朝鮮の場合

Rüdiger Frank

Money in Socialist Economies: TheCase of North Korea

Ruediger Frank

Introduction

Dated January 29, 2010, the Foreign TradeBank of the DPRK (North Korea) issueddocument No. DC033 10-004 to diplomaticmissions and international organizationspresent in North Korea. They were informedthat the use of foreign currency was to bestopped, payments were to be made in the formof non-cash cheques, and that the officialexchange rate of the Euro to the North KoreanWon was changed from 188.2 KPW to 140KPW, effective January 2, 2010.

Foreign institutions and organizations nowhave to obtain non-cash cheques from theForeign Trade Bank, denominated in KPW, inorder to pay for accommodations, meals andservice fees in hotels, fares for transportserv ices l ike ra i lways and a ir l ines ,communication charges, inspection fees,registration fees and commissions paid toinstitutions and enterprises in the DPRK, fuel,office materials, spare parts for vehicles,electricity, water, heating charges and rent.Bank transfers are now mandatory for anytransfers between international organizationsand all money paid to institutions andorganizations of the DPRK (including the salaryof DPRK citizens working in embassies orinternational organizations).

A recent visitor to Pyongyang confirmed in atalk with the author that individuals are subject

to a cumbersome process if they wish topurchase anything. Rather than using astandard hard currency or exchanging it intothe new Won, they now have to obtain a receiptstating the price of the good they want to buy,then present this at a desk where theyexchange their money into exactly the neededamount of North Korean money, and finallyreturn to the shop assistant, hand over theexact amount, and receive the product.

In the preceding weeks, North Korea had madeinternational headlines related to what seemsto be a concerted economic policy initiative.The domestic currency was reformed in a waythat obviously aimed at reducing the amount ofmoney in circulation (link). A few weeks laternews emerged that the use of foreigncurrencies was banned (l ink).

This is no doubt a dramatic move with far-reaching consequences. Money matters forpersonal lives and for society, so when acountry initiates a currency reform, it hassignificant repercussions.

But what are these consequences for thespecific case of North Korea in early 2010? Arepeople in various sectors of society better offnow, or worse? Will the economy benefit orsuffer? Do the reforms promote or impedeforeign trade and investment? Will thedomestic political situation become morestable, or will it deteriorate? Are the economicreforms of 2002 reversed, or were theyintended to be a temporary measure from theoutset? Should we even interpret the currencyreforms as part of the process of powersuccession?

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Money and its functions

To understand the possible motives and effectsof the above-said measures, it is helpful tobriefly remember what money is actually goodfor.

People living in market economies, no matterhow regulated or liberal these are, usually takeit for granted that money serves as a means tostore value, as a medium of payment andexchange, or as an accounting unit. Moneytranslates most of our multiple and complexpreferences created by taste, custom, shortage,future expectations etc. into one commonlanguage. By expressing the subjective andcontext-sensitive value of goods and services interms of money, these goods becomeobjectively comparable both domestically andacross borders.

This is essential for rational decision-making onmany levels for individuals, society and thestate. Thanks to money, we can designate agood as cheap or expensive and decide whetherto or not to buy it. We see whether the wage fora particular job is high enough or too low, afactor upon which we base employmentdecisions. Money helps to determine whether aperson is rich or poor, and on this basis shouldbe taxed heavily or receive welfare benefits. Aproducer can readily see whether costs exceedrevenues, and whether the return oninvestment justifies the time and labor spentand the risk taken.

Money has important political functions beyondthe individual realm. Central banks canpromote or slow growth by adjusting theinterest rate. We consider people poor if theyhave less than a certain amount of moneyavailable per day, and may call on the state tointervene if managers receive “excessive”bonuses. Money is used to determine and fine-tune policies such as minimum wages or socialwelfare. Money is also a simplistic but powerfultool to quantify the size and growth rate of aneconomy. In one word, our whole lives as

individuals or as a group, would be unthinkablewithout money. This is hardly new – but still farfrom being the universal norm.

Money and socialism

Unlike communism, which is an ideal societythat is often said to require no money,socialism is not a moneyless economy.Socialism is a child of the ideal’s ugly sister,reality. As such, it is posited as an intermediarystage en route from capitalism to communism.In socialist theory, the political power of theworking class has already been established, butin society and economy many remnants of theold capitalist system and values still persist andneed to be overcome step by step. Money is oneof these. Communist theory posits that thestorage of value, the exchange of goods andservices, and accounting will no longer benecessary. Superabundance of everythingmakes the issue of dealing with scarcity –which is what economics is all about – obsolete.Hence, under communism, there is no need formoney or other forms of private property.

However, despite claims by overambitiouspolitical leaders or their badly informedWestern enemies, communism has neveractually been achieved. The duality of socialismand communism is much more than just asubtle difference or a synonym. When we lookat the role of money in the Soviet Union, theformer Eastern Bloc, or North Korea, it is clearthat socialism is the name of the game.

One distinctive feature of socialism in thesecountries is that it is not a moneyless society.However, money as such clearly stands inconflict with the political and ideological ideabehind socialism. The result is a somewhatschizophrenic situation. On the one hand,money is disdained and restricted as a sourceof evil, but on the other it is needed for theorderly conduct of economic affairs in naturallyimperfect socialist societies and hence is issuedand circulated by the state, wages are paid inmoney and money circulates in markets.

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The functions of money in socialist economiesare nevertheless severely constrained. Mostprices are set by the state for political reasonsand do not reflect relative scarcity. Access tomoney alone is often not enough to purchasesomething; goods must also be physicallyavailable, one has to have access, andsometimes even a permit to buy. Individualsmay th ink tha t they s t o re va lue byaccumulating money, enterprises may attemptto do rigorous accounting, bureaucrats maybelieve that they maintain fiscal stability, butthey cannot know for sure. Money in socialistsocieties is only imperfectly exchangeable intoother goods. It can only with strong limitationsbe used to estimate the absolute value ofsomething, and even relative value (forexample, “how many months must I work for acar?”) may be indeterminate. Under socialism,prices keep sending signals – but frequently thewrong ones.

In any society the flow of goods and servicesmust be regulated somehow. If money isincapable of accomplishing this, copingstrategies emerge. These include barter trade,the use of foreign (hard) currencies, or the useof political capital. Regarding related effects,the experience of the Eastern Bloc is rich andtelling (see, among others, Rüdiger Frank andSabine Burghart, eds., Driving Forces ofSocialist Transformation. North Korea and theExperience of Europe and East Asia).

North Korea - A “better version” ofsocialism?

Its undisputed particularities notwithstanding,North Korea is a socialist economy, one inwhich the action of market forces is severelylimited. For a long time, it looked like atextbook case of Janos Kornai’s (1992) model ofa classical socialist economy. For decades,there was no free interplay of supply anddemand, prices were set by the state, andcoordination of economic activities took placecentrally and via administrative tools rather

than spontaneously and regulated by money.The focus of production was on quantity, therewas no labor market, and barter trade wasdominant with social ist partners anddomestically. However, until the mid-1990s,unlike its Eastern European brothers, NorthKorea had not excessively violated its ownideological and political principles in terms ofrunning the economy.

Most importantly, North Korea was long able toavoid the most dangerous political effect ofbeing poor – embarrassment. Unlike in EastGermany, there were no capitalist cars drivingthe country’s highways. Under the transitagreement effective since 1972 (link), WestGermans could use East German highways ontheir way to West Berlin from Hamburg,Hannover or Munich. This earned the forex-hungry state an annual fee payable to theForeign Trade Bank of initially 235 millionDeutschmarks, r is ing to 525 mi l l ionDeutschmarks in 1989. The political price forwhat seemed to be a good economic deal washigh. Millions of families, crammed in theiroutdated, noisy and smelly, yet still beloved andcherished Trabant or the slightly betterWartburg, Skoda or Lada cars, saw their pridecrumble to dust on the Autobahn as Mercedes,BMWs, Audis and the other shiny products ofWestern car makers drove by slowly (they werecareful to observe the speed limit, as heftyfines were another source of hard currency forEast Germany). Propaganda did its best topoint to the downsides of capitalism, but to noavail.

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The number of visitors from South Korea, Japanor other Western countries to North Korea wassmall and their movement was restricted. Noparcels were sent regularly to the North bytheir Southern relatives. In East Germany,hundreds of thousands of parcels arrived forthe Easter and Christmas holiday seasons. Andan East German state-run company called“Genex” even specialized in arranging giftsfrom West to East by mail-order catalogue.

In North Korea, at least in the pre-DVD age, noSouthern TV could be watched, while WesternTV was legal since the 1970s in East Germanyfor most of the population. With the exceptionof rare film festivals, there were no foreignmovies in North Korean cinemas. North Koreanyouth might have heard about Southern pop-stars, but they were not omnipresent asWestern music was in East Germany. Until afew years ago, hard currency stores were rareand the possession and use of other than thedomestic currency was banned in North Korea.Unlike East Germans travelling to Prague orLake Balaton in Hungary, North Koreansabroad did not feel like second class Koreans,the ones with the “wrong” won, since few couldtravel abroad.

While in East Germany the state sold a total ofalmost 34,000 political prisoners to the West atan average fee of 90,000 Deutschmarks

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(Rehlinger 1991), there was no sale of politicalprisoners to the South (or no such offers?).North Koreans did not long for bananas andcoffee, as these were widely unknown and inany event there were much more substantialworries.

The main reasons why the North Korean statecould afford not to follow the East Germanexample were a lower developmental level,which facilitated curtailing individual consumerdemands including the hunger for importedproducts, and the sharply reduced role ofmoney by way of rationing and limitedeconomic contacts with the West. NicholasEberstadt, a long-standing expert engaged ineconomic research on North Korea, wrote in arecent article in the Washington Post that KimIl-sung’s country had come very close to acomplete demonetization of its economy in the1980s.

As odd as it may seem, such demonetizationwas indeed rational if we think about the basiclong-term incompatibility of socialism andmoney. Instead of trying to force an unfittingcapitalist mechanism to work for a socialisteconomy, it was largely discarded. This isparticularly true for the domestic economy. ThePublic Distribution System in combination withnominal state-set prices ensured that goodsand services were made available according tothe will of the country’s rulers. Accordingly,there was no need to sell the country’s pridefor hard currency. And poverty, if it goesbeyond the basic level of Maslov’s pyramid ofneeds, is always relative. Most North Koreansmight have been poor in absolute terms, butnot so if they looked at their equally poorneighbors in the same village or apartmentbloc.

In addition, there was the trade-off betweenpoverty and honor: emphasizing the adequatelycustomized tradition of militant Koguryŏ (seePetrov 2004), North Koreans were taught tolook down upon the heirs of Shilla to the South

who lived a life of luxury while the spartanicwarriors up North kept the nation’s enemies atbay. Better being poor but proud, rather thanrich and the lackeys of the hook-nosedAmericans and their Japanese allies. We shouldnot overstate this point, but it is hard to denythat nationalist considerations and what SeligHarrison called a “siege mentality” along withrally-round-the-flag phenomena play aparticularly powerful role in (North) Korea.

Violating its own rules

Until the late 1980s, North Korean societyfunctioned badly, but it functioned. All thepitfalls of spooning with the enemy as observedin Europe could be avoided. People ate, went toschool or work, received ideological training,lived, loved, and died. Ever since the mid-1950sand more visibly since the mid-1960s, NorthKorea had refused to join the experiments ofother socialist countries with collectiveleadership and peaceful coexistence, withrevisionism and dogmatism, with marketsocialism, glasnost and other dangerous ideas.Then, after the turbulent last decade of thecentury, this changed dramatically.

The reasons are subject to guessing and largelyremain a mystery. They presumably includedthe disappearance of socialist trading partnersafter 1990, the change of leadership in1994/1997, and of course the dramatic famineof 1995-1997. In 1998, for the first time ever, apresident took office in South Korea who wasnot strongly-anti North Korea, which mighthave relaxed reservations about economicinteraction. China and Vietnam showedsuccesses in building a market economy whilemaintaining a one-party monopoly on power,which certainly must have encouraged theNorth Korean leadership to consider thisalternative. So the Mt. Kŭmgang tourismproject was started, the first inter-Koreansummit meeting took place in June 2000, andKim Jong-il wrote, in a rare Rodong Sinmunarticle on January 4th, 2001, that North

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Koreans should prepare for a new era,acknowledge the changed environment anddiscard old methods (available only in theprinted Korean version, not on KCNA).

Strangely, and tragically, many observers failedto acknowledge or appreciate this turn evenafter the economic measures of July 2002 andearly 2003 that eliminated state subsidies,devalued the domestic currency, upgraded thefarmers markets, introduced a rudimentarymacroeconomic policy, permitted more privateeconomic activities, and essentially monetizedNorth Korea.

My personal observations on the ground couldnot have been more contrasting. As a languagestudent in Pyongyang in 1991, I could only shopin hotels and hard currency stores usingforeign exchange certificates, and otherwisehad to rely on allotments not only for food buteven for subway rides.

Different Foreign exchange certificatesexisted for foreigners from socialist

countries such as China (red), and forWesterners (green-blue). Similar FECs alsoexisted in East Germany (Forum Scheck),

China, and Cuba.

A decade later the economy was monetized.Foreign Exchange Certificates were abolished,Euros and Dollars could be exchanged for

North Korean won or spent directly. Therewere markets seemingly everywhere, large andsmall ones; legal and semi-legal restaurantsand shops opened, Chinese merchants rushedin and found eager students primarily amongresolute women who soon discovered andmastered the art of trading. During oneafternoon walk in Pyongyang in 2004, I enteredshops with prices marked either in domesticcurrency, US Dollars or Euros. True, NorthKorea was not yet a market economy, but itwas a far cry from the largely moneylesssociety it had so recently been.

An economy previously hostile to consumersnow tried to lure customers with lovingly hand-crafted posters and signboards and even theannouncement of discounts (link). Clearly,money mattered. State, officials and privateindividuals alike did what was common almosteverywhere else in the world – they tried to gethold of some of the wealth of foreign visitors.The level of sophistication was low, but inprinciple, North Korea was, at least in thisrespect, on the way to becoming lessextraordinary if not to say normal.

The effects of monetization

Not surprisingly, the delegation of someallocative functions from the state to money didthe same harm to socialism’s legitimacy andthe government’s credibility in North Korea asit did in the Eastern Bloc decades before.

As soon as North Korean currency developedfrom worthless paper into real money, peoplereacted. At what Pyongyang officials will haveseen as breathtaking speed, the decades-oldpaths along which North Koreans planned theirlives were put to the test and supplemented oreven in some cases replaced. Money hadbecome a serious competitor to politicalcapital. The latter was firmly in the hands ofthe state; but money was much harder tocontrol. Prior to the monetization, individualseither complied with the state’s rules or had nocareer. Now they had the option to give the

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state the cold shoulder and gather prestige,wealth and power through money making thatwas beyond the reach of the state. Many madeuse of this.

The whole ideological foundation of NorthKorea’s society was shaken. Previously unitedin poverty but also in economic equality, andemploying nationalism and xenophobia to fillthe vacuum left by a lack of opportunity forindividual fulfillment, society was quicklydivided into those who were and those whowere not able to use the new chances.Pyongyangites, the privileged few with superioraccess to food, education and state jobs, werestunned to see how the traditionally poorpeople of North Hamgyŏng and other provincesbordering China suddenly became affluent.Chinese goods and Chinese merchants floodedthe country, generating a worrisome déjà-vu forhistory conscious North Koreans who recalledthat this was how Japan prepared colonizationin the late 19th century. Officials had acceptedfavors before; this is an inevitable side effect ofoverregulation anywhere. But now corruptionreached new, almost limitless levels as cash,not computers, watches, cigarettes or liquorwere demanded and offered. With money, onecould get almost anything; state and individualsreacted.

The North Korean state started to sell itspeople, its land, and its pride just as EastGermany had done. This is how we caninterpret the Kaesŏng Industrial Zone, wheretens of thousands of young North Koreanwomen worked for capitalists – the definition ofexploitation. They did so at a fraction of aSouth Korean wage but at higher wages thanthose on offer in North Korea’s own factories.Hard currency began to push all otherconsiderations aside. Their male superiors fromthe South provided a glimpse into the shiny lifein hypermodern South Korea. Cars, mobilephones, MP3-players, fashion – although thesituation differed, the North Korean womenmust have felt as jealous and embarrassed as

the East German family driving in its Trabant.The same, although on a smaller scale in termsof affected North Koreans, happened in thetourist zones.

On a macroeconomic scale, inflation, formerlyhidden, now became visible. It reduced fixedsalaries heavily, adding pressure on officialsand employees at state-owned companies tofind alternative ways of making money. In thefirst years after the economic measures of July2002, i.e. the official monetization, inflationreached levels estimated at 200% annually(link). Eberstadt (op.cit.) provides his ownestimate of inflation in North Korea. Based onthe black-market exchange rate with the USDollar, by November 2009 the North Koreanwon had fallen to just 5% of its 2002 value, adepreciation averaging over 3% per month. Thedenial of access to international markets forgoods, services, technology and capital didlittle to help the North Korean government toovercome these difficulties. The collapsed dealwith Japan in late 2002, i.e. the exchange ofabductees against normalization and bigeconomic aid, is just one case in point. Thetimeline is indeed intriguing (Frank 2005).

All the state could do was watch, wonder, andworry. As long as money had existed as a mereformality, access, distribution and value wereof secondary importance and subject to highlevels of state control. With monetization, thischanged dramatically. Not only did moneyemerge as a serious competitor to the state; itbecame a yardstick to measure the state’sperformance and hence had a direct influenceon the legitimacy of North Korea’s politicalsystem. The DPRK had taken the crucial step toenter its enemy’s game, the money game. It isnot surprising that as a beginner, without muchtraining and lacking most of the necessarycapacities, it did not do too well.

At the same time, to exacerbate an alreadycomplicated situation, the after-effects of 9-11struck. Afghanistan, then Iraq was attacked

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and the elite replaced, demonstrating not onlythe destructive power of US military might butalso its determination to use it. North Koreawas singled out as one of the next potentialtargets by the George W. Bush administration.

So, the economic reforms threatened to destroyNorth Korean socialism while internally at thesame time the external enemy threatened tostrike at any moment. We can speculate abouta domestic power struggle, discontent amongparts of the elite who worried that theircountry would follow Europe, bitter letters ofprotest coming from supporters of the systemin the provinces who could not understand howPyongyang was a l lowing greed andindividualism to destroy the united front ofcollectivist North Korean society.

Turning back the wheel

The currency reforms are so far the mostdramatic attempt to respond to the situationdescribed above. It is a bit of a mystery why ittook the North Korean leadership so long topull the emergency breaker and try to turn theship around. Obviously, it needed some time tofully appreciate the effects of monetization ontheir society. By 2005, it seems, the process oflearning and developing a strategy to react hadreached the stage of action. The financialactivities of international organizations wererestricted, and the first limitations appeared ondomestic trading in the markets. Ideologyreflected this trend by a growing emphasis onorthodox formulations including “socialism”.While throughout 2001 and 2002, the term hadbeen used in a total of 441 and 487 articles,respectively, on the official website of theKorean Central News Agency (KCNA), theirnumber more than doubled in 2009 (980articles) and thereby even surpassed the pre-reform peak of 1999 (832 articles).

The title of the leader reflected the changedmood in North Korea, too. In 2009, KCNA in1,398 articles used the term “SecretaryGeneral” (ch’ongpisŏ), emphasizing his functionas head of the Party. In 2005, this title wasused in only 31 articles, whereas “GreatLeader” (widaehan ryŏngdoja) appeared 850times. The latter had dropped to 37 in 2009.That is, the more statesman-like title “Leader”was replaced during the reform years to lendgreater emphasis to Kim Jong-il’s ideologicalposition as the Party’s leader. Interestingly, thethird and allegedly most important position thatKim Jong-il assumes - that of the top militarycommander is only reflected in the Korean-language version of KCNA, and even there onlyweakly (71 articles in 2009). The Englishedition rarely uses the title “general”(chang’gun) at all, and if so, only in referring topraise by foreigners or to songs sung by NorthKoreans to his glory.

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Other key phrases of orthodox North Koreansocialism such as collectivism (chiptanjuŭi)reemerged, campaigns were led against non-socialist hairstyles, a virtual ban on Westerndress for women (but strangely, not for men)followed. Then, the state tried to limit trading –i.e., petty capitalism – by issuing regulationsstipulating the minimum age of women whoengaged in this business. These reports havenot been officially confirmed but it seems that,in a gradual process, women under the age of50 were banned from working as merchants,apparently to no avail.

Eventually, these careful and gradual attemptsat curtailing the markets were transformed intomore active approaches at reviving thealternative – a centrally planned economy. InDecember 2008 Kim Jong-il visited Kangsŏnand resuscitated the Ch’ŏllima-movement thathad been started there half a century before,stressing massive increases in the input ofideologically motivated labor for the increase ofproductivity and the achievement of economicgrowth. After having fallen to as few as 15articles in 2003 (and in 2007, too), thefrequency of the mention of “Ch’ŏllima” on theKCNA website reached the 1999 level in 2009(125 articles). This has led me to identify a neo-conservative trend in North Korean socialism(link), not to be misunderstood as neo-liberal,but rather as neo-orthodox. “Conservative” inthe North Korean context means no more

experiments, and instead greater state controland coordination, a renewed emphasis on self-sufficiency, a hard-line stance in foreign policyand severely regulated contacts with theoutside world.

Still, it is important to note that the NorthKorean government had for a long timerefrained from simply closing the markets andmassively cracking down on the newlyemerging group of people who made a livingnot as workers, farmers or officials, but byvirtue of their own, more or less privateeconomic activities. Their lives were madeharder and harder, but it was still possible forthem to continue their ventures.

Part one of the currency reform: expropriating the new middle class

Hence, the first part of the currency reform ofDecember 2009 should be seen as heralding anew stage in the government’s quest toreinstall the status quo ante, i.e., orthodox our-style socialism of the 1970s type. By allowingonly a very limited amount of money to beexchanged per person, the state effectivelydevalued almost all domestic cash. Naturally,the hardest h i t were those who hadaccumulated large amounts of money. Therewere two ways to become a KP Won-millionairein North Korea: corruption and trading.Obviously, neither of these was in any wayhelpful for preserving the legitimacy andcredibility of the one-party state, indeed, quitethe reverse. So, in the face of mountingproblems, the authorities finally decided to takeaction.

A n e c d o t a l r e p o r t s h a v e i n d i c a t e ddissatisfaction with the currency reform in theform of small-scale riots, a form of protest thathas hitherto rarely been reported from NorthK o r e a . T h e v a l i d i t y o f s u c h n e w snotwithstanding, it is clear that the state took aserious risk by ending the dangerous marketactivities all at once. The risk is two-fold. First,it was not clear how the beneficiaries of the

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market would react. The state was wellprepared for this, since all stores were closedand security forces were sent to the placeswhere protests seemed likely to emerge.Equally important, and the North Korean stateseems to have underestimated or notconsidered this at all, the destruction of themarkets as a major distribution channel forstaple food and other necessities created avacuum.

One would have expected the state to preparefor taking over this crucial function of themarkets instantly, but again based on anecdotalevidence, this was apparently not the case. Tospeculate wildly, the simplistic logic of thestate could have been that if the goods aretaken from the markets , they wouldautomatically reappear in the state’s coffersand could be distributed as rations by therevived Public Distribution System. However,the planners did not consider two problems:hoarding (a typical feature of socialisteconomies), and the instant drop in inflows offood from China. The latter refers not primarilyto official trade, but above all to the suppliesbrought in by numerous traders andintermediaries semi-officially across the longborder in the North on both sides of Mt.Paektu. This trade bypassed statisticalrecording but might well have amounted toover 500,000 metric tons of food annually.

The results must have been dramatic. Traderswithheld what they had stored as they were notsure what the new prices would be; buyerscould only offer a currency that was nowworthless, or a limited amount of the newcurrency. Accordingly, prices shot through theroof and created a mood of hyperinflation. Thelatter discourages saving, but it alsodiscourages selling, since astute business-minded people would try to convert whateverthey had accumulated into goods of stablevalue, such as gold, rice, or hard currency. Realestate was a less opportune option since, as theGerman term “Immobilie” indicates, it cannot

be moved and hence is a risky investment intimes of state crackdown on private economicactivities.

Part two of the currency reform: closingthe loopholes

It seems that most wealthy North Koreans andtheir Chinese partners opted to convert theirfortunes into hard currency. This is the mostlogical step; gold is hard to get quickly and inlarge quantities, and it is cumbersome to storeor transport. The same is true of rice. ButChinese Yuan, US Dollars, Euros etc. wererelatively easy to come by via China ormiddlemen and promised to be more or lessstable in value. Most deals beyond the basiclevel of the actual markets had been conductedin hard currency anyway.

This was of course not unknown to the NorthKorean state. Therefore, one month after thefirst currency reform that had devalued thedomestic money, it issued a ban on the use offoreign currency. This is not necessarily anextraordinary move, as there are only a fewcountries where regular transactions legallytake place in other than the national currency.However, the intention of the forex ban inNorth Korea was clearly connected to the goaldescribed above, i.e., to reestablish statecontrol over the economy. Hard currency wasseen as a loophole to bypass the effects of thefirst 2009 currency reform, and this loopholewould be filled.

The effects are not yet clear. Obviously, the banon the use of foreign currency hits those who inthe past were able to benefit from access tothis rare good; this includes not only middle-aged women from the villages or intermediarytraders from peripheral Northern provinceswith relatives or ties in China. It affects a largepart of the central bureaucracy with closeconnections to the center of power. Theirreaction will not be seen on the streets. Rather,it will take place behind the scenes, but thatwill not make it less powerful. Officials who lost

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access to power, affluence, and a future fortheir children in the reforms will ask foralternatives. If the state can offer these – fine.If not, frustration will build among this keygroup that Segert (2009) has called the“Dienstklasse” (service class).

Certainly, foreigners in North Korea willquickly feel the inconvenience of not being ableto pay their bills directly. This will not lead tothe closure of embassies, but Western investorswill have one more reason not to come to NorthKorea. The state has significantly improved itscapabilities to control the economic activities offoreigners in the country, but it has also raisedtransaction costs. These do not matter for allinvestments, such as those made for politicalreasons or those backed up by strong politicalinterests, including the US$ 10 billion by Chinathat were reported in mid-February 2010.

There is no indication that the North Koreanstate wants to end economic exchange with theoutside world. However, stage one and stagetwo of the currency reforms reveals the strongdetermination to return to the driver’s seat andto be in full control of the domestic economy aswell as of foreign economic relations. Thevision of the planners in Pyongyang is adomestic population that is supplied via statedistribution and rationing, and foreign tradeand investment that are channeled through theMinistry of Foreign Trade, the Foreign TradeBank, and the Foreign Investment Bank ratherthan via single ministries or even, beware,single enterprises. This would be a return tothe pre-reform system, and in fact, to the pre-Kim Jong-Il system. Has the current leadershipgiven up on reform?

The new money – a glance at succession?

Again we are speculating, but it’s worthrecall ing how mysterious the suddenintroduction of economic reforms in the early21st century was and still is. Of course it has todo with the famine of 1995-1997 and the partialanarchy that emerged as a short-term

consequence in a few areas. But is the oftenstressed image of a “state that grudgingly andw i t h o u t h a v i n g a n y c h o i c e s i m p l yacknowledged changed realities” really enoughto explain why the same state pushed activelyfor the far-reaching and risky reforms of 2009that we have described? The currency reformshave shown clearly that the North Korean stateis able and willing to end a phase of economicexperiments and relative laxity if it wants to.Why did this not happen in 2002, five yearsafter the end of the worst of the famine, whenthe chance existed to return to the status quoante?

It is largely undisputed that the political systemof North Korea is a form of authoritarianism,with the leader being a strong central figure.Any major development, including those ineconomic policy, would be unthinkable withoutthe consent of the leader. In fact, the NorthKorean system is hardly reputed for fosteringmuch creativity or initiative at lower levels ofpower, so Kim Jong-il might himself have hadthe idea of trying some Chinese-style changes.His article in the Rodong Sinmun of Jan. 2001,cited above, is one indicator of his personal anddecisive involvement.

Interestingly, rumors about his health andabout succession have coincided with theharsher parts of the North Korean campaign toreturn to orthodox “our-style” socialism,including the second Ch’ŏllima movement, thecurrency reforms, and the subsequentattempted closure of markets. One often heardinterpretation is that he stands behind thesemoves in order to prepare the ground for atransfer of power to his youngest son Kim Jong-eun. This is a questionable conclusion, sincefew people will remember the work-harder-campaigns of the 150- and 100-day battles aspleasant, or the currency reforms as anencouraging sign.

We should take into consideration thepossibility that the end of market-oriented

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reforms and the neoconservative swing mighthave to do with the weakening position of KimJong-il. He has never done much to prepare oneof his sons for succession; but suddenly, assoon as his health gets worse, we see almosthasty moves. Who is behind them - Kim Jong-ilwho is preparing a smooth transition to thenext generation, or the paladins who worryabout their power and act to assure that thepublic is presented with a succession modelthat is easy to understand and needs lesspreparation than, for example, the moresubstantial transformation to a collectiveleadership?

It is no coincidence that the new currencycontains some information on succession, inparticular the bank notes that are dated 2008,although we do not know for sure whether theywere actually printed in that year. Alas, NorthKorea has been famous for dealing verycreatively with dates on paper. In any case, inDecember 2009 for the first time in NorthKorea’s history there is a reference to anotherreal person on the country’s money. While thehighest note (5,000 Won) appropriately bears apicture of the Eternal President Kim Il-sung,the second-highest bill (2,000 Won) shows aplace that every North Korean child canidentify without fail. This is the log cabin in thesecret camp beneath a rock that came to beknown as Jongilbong, named after Kim Jong-ilwho according to official North Koreanhistoriography was born here on one coldFebruary night of 1942 in the midst of theheroic anti-Japanese struggle that his parentsand their fellow guerillas were leading. Thename “Jongilbong” has been carved deeply intothe rock to confirm this event. The thirdhighest bill (1,000 Won) shows the birthplace ofKim Jong-il’s mother Kim Jong-suk in Hoeryŏng,North Hamgyŏng province.

One precondition for Kim Jong-il to be able topass his power on to one of his sons is that heimproves his own position in the North Koreanhierarchy of power. Since 1994, Kim Jong-il hasbeen more the loyal son of Kim Il-sung than aleader in his own right. If the reference to himand the family on the banknotes is aimed atelevating Kim Jong-il’s legitimacy to a moreindependent status, then this would indeed be asign of preparation for a hereditary succession.However, we have yet to see more of this, suchas a statue of Kim Jong-il or a Kim Jong-il plaza.The “revolutionary family” of Mt. Paektuincluding Kim Il-sung’s first wife Kim Jong-sukhas been venerated for years; this is still theimage of the first generation passing on powerto the second. The third generation does notyet appear; at best we could argue that theemphasis on the bloodline as such wouldbenefit one of Kim Il-sung’s grandsons.

In this regard, the new money clearly shows asignificant development, but it seems too earlyto determine precisely the meaning forsuccession of the reference to Kim Jong-il andhis mother on the new notes.

Outlook: The future of money in NorthKorea

The current state of affairs is unclear. Thedocument cited at the beginning of this papershows that by the end of January 2010, any useof hard currency was prohibited. By mid

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February, reports emerged that the state hadrelaxed its regulations. The latter would besurprising and indicate a really (too?) quickretraction of the most significant economicpolicy measure of recent years. It is too early tomake an even weakly educated guess here.

But from a long-term perspective, it seems safeto say that even if, and this is a big if, thecurrency reforms manage to achieve the goal ofreestablishing the state’s control over theeconomy and its domestic and externaltransactions, this is unlikely to remain stablefor more than a few months or years, since thekey problems of the North Korean economyremain. The systemic deficiencies led to thefamine of 1995 and to the reforms of 2002, andthere is no reason to believe that such eventswill not be repeated. The heart of the problemis that the North Korean state in its currentform will most likely not survive anotherArduous March. Society has changed along thelines outlined above; this is no longer the sameNorth Korea, even if outer appearances can berestored. Too many people have gotten a tasteof how an alternative economic model couldwork. As soon as the typical problems of astrictly centralized socialist economy reemerge,and this won’t take long, there will be voices invarious strata of society demanding a repetitionof the market-oriented reform experiment, thistime avoiding earlier mistakes. Re-monetizationwill be part of this, one way or the other.

If a collapse can be avoided, and there is atleast some reason to be optimistic here givenNorth Korea’s demonstrated resilience, a lessxenophobic and smarter leadership inPyongyang could cooperate more closely withits Chinese neighbors and enlist what has beenthe secret of all economic “miracles” inpost-1945 developmental dictatorshipsincluding the one south of the 38th parallel –strong, if not unconditional politically-motivated support by a powerful and potentally.

Meanwhile, the language of North Koreanpropaganda had become more militant by 2009.The word “confrontation” was used in 162KCNA articles in the year of the inter-Koreansummit (2000) but rose to 562 in 2009, whichwas still more than twice as many as in 2006(the total number of articles has remainedrelatively stable). On the other hand, we shouldalso mention that the frequency of “friendship”(ch’insŏn) in the Korean-language version ofKCNA rose to 849 in 2009, up from just 60 in2002 (and from 407 to 639 in the Englishlanguage version). So it seems that NorthKorea is not only targeting its enemies moreintensively but also emphasizing alliances withfriendly nations such as China and Russia, aswell as the once much-touted South-Southrelationship and the Non-Aligned Movement.

The experience of European socialism hastaught that once “real” money is allowed tocirculate, there is only one way forward.Monetization without letting money fulfill itsfunctions will create a contradictory situationthat can quickly turn out to be lethal for a half-hearted state. With some luck, the currencyreforms have won North Korea time to take abreath, resolve crucial issues including thefuture of its political leadership, and develop abetter reform strategy with the help of itsChinese ally.

Ruediger Frank is Professor of East AsianEconomy and Society at the University ofVienna and an Asia-Pacific Journal associate.He is Deputy Chief Editor of the EuropeanJournal of East Asian Studies and a co-editor ofThe Korea Yearbook, published annually since2007. He wrote this article for The Asia-PacificJournal. He can be contacted here.

Recommended citation: Ruediger Frank,"Money in Socialist Economies: The Case ofNorth Korea," The Asia-Pacific Journal, 8-2-10,February 22, 2010.

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